A checklist for your financial literacy in SaaS

Since 2012, November in Canada has been recognized as Financial Literacy Month. This year’s theme is “Take charge of your finances!”

While the intended audience is individuals, numbercrunch co-founder Susan Richards believes this sound advice is just as relevant and timely for companies that have a Software-as-a-Service (SaaS) business model.

“Because the concept of SaaS has only increased in popularity within the last two decades, even if you were university educated in finance and accounting, you are unlikely to have been formally educated on its financial nuances,” she says.

This knowledge gap, she adds, should not leave you embarrassed. You are not alone. And admitting what you don’t know is the first step toward learning what you need to know.

Here are Richards’ tips to help you increase your SaaS-Q and take charge of your SaaS finances as you head into 2020:

1. MRR

Monthly Recurring Revenue should be considered the lifeblood of any SaaS.  If you are selling an annual license subscription, it is 1/12 of the subscription cost.

“MRR is the base unit of many SaaS KPIs and therefore is always what I recommend as the common unit of measurement over Annual Recurring Revenue, or ARR,” says Richards.

2. MRR Growth Rate

This, Richard says, answers the question of “How fast is the company growing?” Which makes it one of the top metrics SaaS companies should track. This is why she argues in favour of moving from being ARR-centric to MRR-centric.

MRR Growth Rate is calculated by measuring the percentage increase over the previous month. So if MRR last month was $10,000 and it’s $12,000 this month, the  MRR Growth Rate is 20 per cent.

3. Runway

“Cash is to a SaaS business as oxygen is to humans,” says Richards. “It’s imperative to know how many months your cash balance will be able to cover your losses.”

The quickest way to nail down a forecast is to calculate how much cash the business is currently burning per month and divide that by the cash remaining in the corporate bank account.

4. Churn

Just like in the telecom industry, churn occurs when customers (subscribers) stop doing business with you.

“Churn is a reality in any business, but for a SaaS business the negative impact of churn is harder to absorb because the model itself relies on long-term customer relationships,” Richards says.

For an enterprise-level product, she advises that churn should be under one per cent per month. Churn rate can be calculated by dividing the lost MRR by the starting MRR.  

5. LTV:CAC

This is the ratio of revenue and spend per customer.

“It is something you really need to master or you won’t know if you can sustain a profitable business,” Richards says.

Lifetime Value (LTV) is the net revenue value of the customer over the lifespan of the relationship. Customer Acquisition Cost (CAC) refers to the expenses that are necessary for bringing in a new customer. 

“The thing about LTV and CAC is that they are fairly meaningless on their own and it is really only the ratio of the two compared that gives you financial intelligence,” Richard says. “The ratio of LTV:CAC should be at least 3:1 for your business to become profitable.”