Four Key Elements for Successful SaaS Financial Operations
By Tim McCormick, CEO of SaaSOptics
The importance of subscription renewals in overall business performance today has created opportunities for the CFO role to expand beyond finance to play a bigger part in strategy around customer experience and satisfaction. But, that isn’t all that’s changed.
With SaaS came real-time data that allows us to make important business decisions with a great deal of accuracy. Audits are easier than ever and we can quickly accurately show potential investors a 360-degree view of business viability. As a result, raising capital is a lot less stressful. And although the benefits of moving to this model are easy to see, understanding the difference between managing the financial operations of a traditional business and recurring revenue model is critical.
Why Traditional Won’t Work
Customers often tell us that they wish they knew then what they know now – that traditional reporting, accounting software and approaches aren’t ideal for the dynamic nature of a recurring revenue model.
Buy why not?
Many of the robust finance systems that address SaaS business requirements are expensive and simply out of reach for emerging businesses. So instead, they create homegrown SaaS financial operations by cobbling spreadsheets together with traditional accounting software. I speak from experience when I say that spreadsheets are powerful tools, but are poorly suited for managing a recurring revenue business. Rely on them for too many processes and your financial operations will suffer. Before long, you’re stuck in the spreadsheet vortex and realize you need real-time, consistently defined metrics and lack confidence in the accuracy of your data.
What Will Work
Successful financial operations require these four things:
- An understanding of the key performance metrics you should track and why.
- A subscription management solution that makes it easy to manage customer financial information and can scale to support the financial operations of your business through every stage of growth.
- Quick access to metrics and high-quality financial information for making smart decisions, properly managing your business and raising capital with confidence.
- GAAP financials that, when combined with the subscription metrics, provide the insight and financial maturity you need to successfully manage and grow your business, and raise capital.
Metrics That Matter
At a minimum, these performance metrics will provide the visibility you need to understand and optimize your recurring revenue business:
- Monthly Recurring Revenue (MRR). MRR is a measure of the predictable and recurring revenue components of your business and it’s probably the most important SaaS metric of all because it gives you the operational insight to accurately forecast, plan and measure growth, regardless of the subscription term length. If your business offers both annual and monthly subscription terms, MRR normalizes the varying term lengths that many SaaS businesses end up with over time and allows you to treat data consistently, arguably the most important thing to do when dealing with subscription metrics. Not only do you need to track new MRR, but the ability to track expanded, contracted, expired and canceled revenue is essential to understand the true health of your business.
Many of the following metrics are calculated using MRR so it’s important to get this one right.
- Customer Lifetime Value (CLV). This is where that change in the CFO role I mentioned earlier comes into play. CLV is the lifetime value of a customer or estimate of the projected total value of a customer over its lifetime. The challenge of course is in the calculation of churn or renewal rate and the average MRR – all inputs into the CLV calculation. So, before you can accurately calculate CLV, you must calculate average MRR and customer churn.
- Customer Lifetime Value/Customer Acquisition Cost (CAC) Ratio. CAC is another critical metric because it allows you to determine the CLV/CAC ratio. In other words, what you can expect to get in customer lifetime value for every dollar you spend to acquire that customer. You’ll need to calculate CLV and CAC separately to get this ratio. Ideally, you want CLV to be 3 to 10 times higher than CAC. This can also be a very telling metric for VCs because a customer lifetime value that is significantly greater than the cost to acquire that customer, while not completely conclusive, is a good indication that your revenue engine is working and resources are being allocated efficiently.
Moving away from simple profit and loss is inevitable in today’s subscription business and the “single source of truth” that comes with tracking these performance metrics will give you greater insight, allow you to make important decisions on the fly, identify opportunities for growth and respond more quickly to market changes.
Tim McCormick is the Chief Executive Officer for SaaSOptics, affordable and flexible subscription management platform for emerging and growth SaaS and subscription-based businesses. Founded in 2009 by entrepreneurs who lived the challenges of running their own SaaS business, SaaSOptics is the only solution that can scale with a growing business, providing the day-to-day financial management capabilities needed, and the auditing, reporting and analytics that are critical for future growth.