It depends, but creating a financial model can help make you this and other valuable decisions.
Unfortunately, there’s no universal SaaS financial model template, and you have to figure out your own based on your key goals and metrics.
But don’t worry – after helping dozens of SaaS founders create their financial models, we can tell with certainty what works and what doesn’t.
In this article, we’ve gathered our best practices for creating a SaaS financial model and typical mistakes to avoid at all costs. Keep reading to discover more.
A SaaS financial model is a financial model customized for subscription-based software companies that can be used to forecast their financial performance and make informed decisions. It’s based on your current data and realistic assumptions around key performance indicators for every SaaS business, such as monthly recurring revenue and customer acquisition cost.
Ideally, SaaS financial models should cover a three-year period, not longer, as SaaS is one of the fastest-changing industries and, as such, requires regular updates and revisions.
Why do you need a SaaS financial model?
If you’re still not convinced, here are six good reasons to start working on your SaaS startup financial model today:
Estimate expenses and create a hiring plan: A good financial model is essential for managing business finances, as it anticipates most of your future expenses, including operating expenses and customer acquisition costs, which will allow you to allocate your resources more efficiently and plan the hiring process.
Identify top KPIs and metrics: Key metrics can vary from one SaaS company to another, so knowing what your priorities are in the next period will help you create more realistic goals and track your progress. Check out our guide on key SaaS metrics to help you understand what to focus on.
Avoid running out of money: Your financial model should roughly estimate how much money you need to stay profitable, which will again help you focus on the most important things and avoid a trap that many new SaaS founders fall into.
Identify key drivers of revenue: Understanding what generates the most revenue (for example, which subscription model is the most profitable) will help you create recurring revenue models that work for your SaaS.
Raise money: A well-structured financial model is necessary for attracting investments and getting funding, as it helps potential investors assess your company’s health and growth potential. However, remember that you’re creating a financial model for yourself and not to impress potential investors so make sure it’s realistic and honest based on your real circumstances.
Plan how to use the raised capital: A financial model helps you prioritize your future moves, so you can plan how much you need to invest in product development, marketing, customer acquisition etc.
SaaS financial model: Key elements
Here are the elements to include in your SaaS financial model:
Ad/marketing/sales drivers: key factors and actions that contribute to reaching more customers and increasing sales
Revenue: your revenue projections, with a special focus on monthly recurring revenue and annual recurring revenue for SaaS
COGS (Cost of Goods Sold): costs associated with building your SaaS product
SG&A (payroll, sales, marketing): projections of your operational costs, such as salaries and sales and marketing expenses
CAPEX (Capital Expenditures): whether you plan any significant investments in assets that can drive long-term growth, such as technology, servers, hardware, cybersecurity, patents etc.
Building a SaaS financial model: Do’s
Start with a non-financial model: Before going into finances, you should create your business model and get clear on what your goals are, who your customers are, what value you can create for them and so on.
Focus on the most important metrics: When it comes to KPIs, less is more! Instead of getting lost in dozens of metrics, identify those crucial for your success and stick to them when tracking your progress.
Always start with revenue: Try to project how much revenue your business can realistically generate and make sure that it’s enough to cover operational costs or any capital investments you might need.
Make several scenarios:Financial forecasting for startups should include multiple scenarios to help you anticipate and prepare for all possible market conditions. At Fuelfinance, we like to create a target scenario which is your optimistic, ambitious plan in case everything goes well. But we also create a baseline scenario which is basically a worst-case scenario, helping you predict and overcome potential obstacles.
Make it playable and use formulas: We suggest creating an interactive financial model that allows you to adjust variables such as pricing plans, customer acquisition costs and churn rates so you can see how changes in each element could impact your financial projections.
Use bar charts to spot errors or notable ups and downs: Bar charts are not only a great way to visualize your financial data but they also allow you to quickly spot mistakes or any large fluctuations in metrics such as monthly revenue or expenses.
Test your model: Make sure the numbers are real by testing your model in different scenarios and simulating different financial conditions, such as rapid growth or economic downturns, to see whether its predictions are accurate.
Add previous period’s data to the same spreadsheet: Add your historical data so that you can compare it period-over-period, which may help you spot patterns and trends and measure progress over time.
Start with a cash flow model for early-stage businesses:Small business financial management has a different set of rules than enterprise-level companies.A cash flow model for an early-stage startup focuses mostly on liquidity and immediate financial survival, which is essential for managing daily operations and ensuring your SaaS company’s financial health.
Connect expenses growth with revenue growth: You should strive to always maintain a balance between your revenue and expenses and prevent yourself from stretching too thin, making sure that your business growth is supported by a stable financial structure.
Building a SaaS financial model: Dont’s
Download complex template without understanding how to use it: In financial planning, simpler is often better, especially if you’re a new SaaS founder creating their first financial model. Avoid complex templates if you don’t have professional help, as it may lead to adding your data in an incorrect way, misinterpreting your metrics and, finally, inaccurate financial projections.
Make too many variables: This is one of the most common small business financial planning mistakes.Too many variables can unnecessarily complicate your financial analysis, leading to confusion and problems in decision-making.
Make exponential revenue growth: You should never just assume exponential revenue growth as you never know what can change in the future, especially in a competitive industry like SaaS. These assumptions can lead to unrealistic expectations and overextending your financial resources, anticipating significant revenue increases that may not happen yet.
Use different financial models for you and investors: Using different financial models can lead to confusion, inconsistency and losing investors’ trust if they find out. Remember that transparency is the best way to build trust and lasting stakeholder relationships.
Ignore your historical patterns and data: Whether you’re satisfied with your previous results or not, your historical data can provide insight into trends, seasonality and business cycles, helping you create realistic future projections.
Predict revenue without key marketing and sales (S&M) drivers: These factors are crucial for accurately projecting your revenue. Be honest with yourself and reflect on the actual capacity of your sales and marketing efforts to generate more business instead of being overly optimistic.
Model revenue growth with constant S&M budgets: Don’t assume that your sales and marketing budgets will never change, as you may need to make cuts in these areas in order to redirect your resources somewhere else.
Forget about financial model updates: Regularly update your financial model by adding new insights and removing outdated assumptions and data, making sure that it reflects the current market conditions. You should review your financial model at least quarterly, but also whenever something big happens, such as major market shifts or launching a new product
How to build a financial model
Building financial models can be done in different ways, and everything depends on your level of experience, budget and time you have. Here are three ways to do it:
Create a spreadsheet model: If you’re on a tight budget and can’t afford sophisticated financial planning software tools, you can create a financial model using Google Sheets or Excel templates. One of the simplest methods is to build a three-statement model consisting of your income statement, cash flow statement and balance sheet. The biggest downside of this method is that you’ll have to manually update your spreadsheet with new data.
Invest in financial modeling software:Financial modeling software is the best way to automate financial modeling, as it not only saves you time but also reduces errors and makes sure the plan is always up-to-date. There are different types of software depending on your industry, and Fuelfinance is a great option for creating a SaaS startup financial model.
Use an outsourced financial service: Financial modeling is one of the most popular outsourced financial services as it requires knowledge and expertise you can get only from a financial expert with a lot of experience. This is especially important if you need a strong financial model for getting investments and funding. Our team of financial experts at Fuelfinance can act as your fractional CFO, creating your financial model and offering support along the way. We’re specialized in startups and SaaS financial modeling, which is much different from already established enterprises.
What next?
Now that you’ve created your SaaS financial model, here are the next steps:
Make a monthly plan/actual analysis: You should conduct a plan/actual analysis on a monthly basis to compare the financial metrics you’ve projected in your model with the actual financial results you’ve achieved and see whether your projections were accurate.
Adjust your model to keep it relevant: If you discover any discrepancies during the analysis, don’t worry – no financial model is ideal and these insights will just help you improve it. Adjust your model according to the new data, market trends or any conditions that have changed.
Share the model with your team: The financial model is not only reserved for your financial department, as it directly affects sales, marketing and other teams. Share the model with your team to make sure everyone is aligned on the company’s financial goals and plans and to promote transparency and accountability.
Use it to track your key KPIs: You can use a financial model template to track your SaaS metrics such as MRR, ARR, customer acquisition cost, customer lifetime value, churn rate and others.
How can Fuelfinance help with your SaaS financial model?
Creating SaaS financial models can be tricky, especially for new business owners. But the good news is that you don’t have to do it alone – we are here to help you.
Our financial management solution specializes in helping SaaS startup founders and small business owners take control of their finances even though they may not have a background in finance.
Here’s what we can do for you:
Financial projections: Our financial modeling software creates accurate financial projections based on multiple variables. Our goal is to make sure you’re prepared for all possible scenarios and that’s why we create two financial models: target scenario (optimistic financial model, in case everything goes well) and baseline scenario (worst-case scenario, with the least favorable conditions, so that nothing can surprise you). The forecasts are updated monthly or weekly, based on your needs.
Custom KPI dashboard: Not sure what are your key metrics? Don’t worry, our software will highlight the most important agency metrics based on your SaaS business model and create a custom dashboard where you can track your most important KPIs in real time.
Plan/Actual analysis: Our tool tracks your metrics and does plan/actual analysis on a monthly basis and then uses that data and insights to create even more accurate financial projections. We can also generate all the financial statements and do your unit economics.
Advanced automation: Remember how we said you’ll constantly have to update your SaaS financial model? Well, Fuelfinance eliminates a lot of manual work as our tool tracks changes in real time and automatically updates your financial data.
Expert support: You’ll get a dedicated team of financial experts who will act as your outsourced CFO, providing unlimited support and addressing all your questions and concerns.
If you’re just starting out and your financial data is a mess while investors are pressuring you to share your business plan with them… We’ve got you covered.
Try out our Bootstrap plan made for pre-seed founders just like you. Here’s what you can get completely for free:
Financial reports: Our software will help you create all the necessary financial statements, including P&L statements, cash flow statements and balance sheets.
Financial planning: It’ll create a manageable financial plan that actually makes sense for your SaaS business model, unlike complex templates you’re seeing online.
Custom dashboard: You can keep track of all your metrics in one place and forget about tables and spreadsheets.
Learning resources: We’ve prepared tons of videos and tutorials custom-made for SaaS founders that will take you from a beginner to an expert in no time. You’ll learn how to do financial analysis like a pro and many more things.
Creating a SaaS financial model seems like a lot of work, but the good thing is that you don’t have to do it manually.
There’s no need to spend hours trying to figure out complex mathematical formulas and bother with spreadsheets when we’ve created a custom solution for you – SaaS founder.
Fuelfinance helps you create a tailor-made financial model with the KPIs that matter the most to you.
Book a free demo and see why so many founders decided to manage their finances with Fuelfinance.
FAQs
How to build a financial model for SaaS?
Start by defining your revenue model and key metrics such as MRR, CAC and customer churn. Project revenues based on payment plans and growth rates, but also consider your historical data. Don’t forget to include all the expenses that may grow as your business grows.
What is the SaaS revenue model?
The most common SaaS revenue model is the one based on recurring subscription fees that users pay to access your software, usually monthly. It can have different pricing tiers and offer in-app purchases or add-ons. Many SaaS companies offer a freemium model where the basic version of the software is free, while users have to pay to access the more advanced features.
How do you calculate the revenue of a SaaS company?
It may depend on your SaaS financial model, but the quickest way is to calculate the average revenue per user and then multiply it by the number of users. You should consider both monthly recurring revenue and annual recurring revenue. Also, don’t forget to consider one-time payments and additional revenue from upsells and add-ons.
How do you project SaaS revenues?
You can make financial projections based on your SaaS business model – try to estimate how many new customers you can obtain in a given time period and the cost of your product or the average revenue per user. Make sure to include the churn rate in your calculations, as some customers might leave.
