Software as a service (SaaS) is a service that delivers applications over the internet. SaaS can also be called web-based software because no additional software is needed for the service provided. Users can access the service via web service since the SaaS application runs on a SaaS provider`s servers.
The financial components of SaaS describe the financial operations of the Software as a service business. The majority of SaaS companies’ customers are billed monthly. However, for the ease of customers, an yearly basis is also available for the understanding of annual billing.
Like any other business, the main financial components of the SaaS business model are the Balance sheet, cash flow Statement, and Income Statement. The success of any business can be measured by analyzing these components.
The fundamental function of any SaaS business model is to represent the profit of the business. Revenue and Costs are two of the main parts of the Income Statement. Cost is deducted from the revenue to find the company’s profit for the year.
The revenue Of the SaaS business model calculates all the incomes that are earned by the business. The important part of the SaaS revenue model is its recurring revenue. Recurring revenue means there are consistent customers who purchase the business services on the regular basis. SEO Audit Pros can help determine revenue gained from SEO work.
With recurring revenue, SaaS businesses can predict their future cash flows. SaaS business models use –churn rate– to calculate their recurring revenues. Moreover, recurring software revenue is another component that makes up the total revenue of any SaaS model.
Software revenues are earned through maintenance and support contracts. Non-recurring revenues are the final component of revenue. Non-recurring revenues are not regular payments. These types of payments may happen inconsistently and no one can tell if this type of revenue can occur again. These three components are added to get the final revenue figure.
Cost of goods sold represents the cost of service provided by SaaS companies to achieve their revenue. The costs included in COGs of SaaS business models include professional services cost, Web hosting, website updates cost, customer support cost, etc. The revenue is deducted from COGs to calculate the gross profit for the SaaS business.
This type of expense is associated with service operating costs. Costs like marketing and commissions are included in the operating expense of SaaS business. Businesses can forecast the cost needed for revenue generation through operating expenses.
Cogs are deducted with operating expenses to calculate the final profit. This profit is added to the balance sheet of the SaaS business model.
The balance sheet of any business represents the company’s assets, equity, and liabilities. Like any business, SaaS businesses also draft their balance sheet for the month-end.
For Saas business assets are the cash that is due from its subscribers. Other assets for SaaS business may include expenses that are already paid for any events or marketing campaigns of web-based software services.
Liability shows the amount that is owned by the business. Current liabilities of the SaaS balance sheet are referred to as deferred revenue. Saas business records deferred revenue in the liability portion since this revenue is not earned yet. For example, a monthly subscription is paid by the customers in advance.
It is the value of any SaaS business model after the liabilities are deducted from it. The value of equity represents the worth of the SaaS business model for investors.
Cash Flow Statement
Cash flow is another important financial component of the SaaS business model. It is a financial statement recording the amount of cash coming in and going out of the business. Like any business cash flow indicates how well the SaaS business is doing in terms of managing its cash. The core components of the Cash flow statement are cash from operating activities, cash from investing activities, and cash from financing activities.
Cash flow from operating activities
Cash flow from operating activities is the main component of the Cashflow business. This component indicates the amount that SaaS company is bringing in from its day-to-day activities. The company should have sufficient working capital to run the regular activities of the business. Running capital is required for advertisements and another cost to bring in new subscriptions.
In other businesses, the working capital is in positive numbers since much of the revenue is generated after the product or service has been provided. However, in the case of SaaS, the working capital is in negative numbers. The negative number indicates that advance payment is used to pool business activities.
Cash flow due to investing activities
Cash flow due to investing category refers to money spent on non-current assets to support customers. In the case of SaaS companies, their cash flow from investing activities is office furniture, networking equipment, etc. Negative cash flow from investing activities might indicate that a SaaS company invested a huge amount of cash for the betterment of the company.
For the long-term benefits, many companies invest a significant amount in this type of cash flow. For example, SaaS investing in research and development for the betterment of the services.
Cash flow due to financing activities
Cash flow from financing activities shows the difference between cash coming in and cash going out that are used to fund the company. The activities of this cash flow type include equity repayment, dividends paid to shareholders of the SaaS company, and debt assumptions.
Tracking financial metrics is important for any Saas business model. Finance metrics are crucial for the accuracy of the financial components explained above. We are going to talk about the most important financial metrics for the SaaS business model.
1. Monthly Users
For the accuracy of financial components like income, a statement company must have accurately forecasted subscribers. This figure will help the company to calculate its revenue and net profit value.
2. Churn Rates
Churn rate refers to the ratio of subscribers who left your company service e.g % of customers unsubscribing. When the ratio of churn rate rises it gives a warning that something is wrong with the services being provided.
3. Customer Acquisition Cost
Customer acquisition cost refers to the company cost required to bring in additional subscribers. This metric is useful for the preparation of SaaS cash flow.
4. The average cost of service
The average cost of service refers to the cost of providing company service to customers. Services include all sorts of support, service features, and satisfaction.
5. The average revenue per user
The average revenue per user helps forecast the cash flow for any SaaS business model. The company can make comfortable decisions for software improvements, additional features, and customer outreach.
6. Customer Acquisition Cost payback time
Customer acquisition payback time calculates the months required to generate sufficient revenue to cover the additional customer cost. Business wants little time to cover up their costs of acquiring customers for faster profit generation.
7. CAC to LTV Ratio
This ratio represents the lifetime value of customers and the time it takes to acquire them in the first place. This ratio will help the company to make decisions about software with certain features that are working well or not.
How to make a financial model for SaaS Company?
When it comes to making a financial model for a SaaS company, there are several unique factors to consider. The SaaS business model is based on recurring subscriber revenue rather than one-time product purchases.
This is why financial models for SaaS companies revolve around the users and feature metrics that allow experts to check how much revenue each user brings. Additionally, it also helps them determine how loyal are the customers to the company and how much it costs to acquire a user.
Considering the metrics mentioned earlier, financial models for SaaS companies help gain a holistic view of the users. This allows them to understand how to drive additional growth from the users.
FAQs: How to make a financial model for SaaS Company?
Here are some common questions asked about financial models for SaaS companies.
- What is SaaS financial model?
SaaS or software as a Service Financial Model is a digital balance sheet used to track growth rates and any other business aspect that can be captured in numbers. Not only do these numbers help companies grow but also make projections and hypotheses.
- How do businesses forecast SaaS?
Forecasting SaaS is a lengthy process, which includes several stages or parts. Generally, companies start with analyzing the past performance and the current sales pipeline. Furthermore, a business keeps track of the add-on sales and probability of renewals. Depending on the market conditions and nature of the business, a SaaS model might include some other additional factors as well.
- What is SaaS Pricing?
SaaS pricing is a broad term used to describe the ways SaaS companies choose to charge their customers. Although there are many different ways but the most common tend to be feature-based pricing, flat-rate pricing, and hybrid-pricing models.
Financial components for SaaS business are crucial figures for investors, creditors, and the company itself. With financial components, the performance of the company is evaluated most accurately. These components provide important insights into the company’s past and present performance and accurate steps can be taken to improve the performance of the company.
The knowledge of SaaS business model cash inflows and outflows allows investors to make predictions on whether the company is capable of paying its expenses and garner profits in the long term or not.