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:
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.
“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.
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.
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.”
Getting your SaaS house in order
Richards believes now is the time to commit to tracking these metrics monthly in 2020, for optimal viability. Until this is achieved, she offers the following tips on how to cover costs:
Charge annual license fees in advance. Entrepreneurs often think all clients want to pay monthly, but for enterprise level clients, a one-time bill in advance for an annual license may actually be easier to get through their procurement process.
Ensure your annual license fees cover your CAC. Entrepreneurs have a tendency to underprice their subscriptions. Divide your sales and marketing expenses by your deal flow volume (aka CAC) and ensure your total annual license fees are equal to or greater than this number. If you have charged your license fees in advance, you will now be funding your business growth through customer acquisition – this will be of great interest to potential investors.
Access loans before you run out of cash and credit. Do you have an 18-month runway today? If not, talk to a BDC rep as soon as possible. BDC is great to work with and if your personal credit score is still in good shape, the likelihood of an approval is good.
Less is more. Most businesses run out of resources when they try to grow too quickly. Maintain a narrow focus until you’ve achieved favourable metrics and only consider expansion into new markets, verticals, etc., once you have verified financial success in one.
“The SaaS business model has great potential for prosperity but it requires ruthless utilization of cash resources to take off into a profitable company,” Richard says.
For more information, contact numbercrunch.