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In this article, we shall get back to basics: What is SaaS finance, and what financial phases can you expect your business to go through?
As a SaaS business, you’re competing not only for loyal customers and recurring revenue, but also for the attention of investors and major software companies who may want to purchase your product.
When it comes to understanding finance for SaaS companies, there are key differences between more traditional financial models and SaaS-specific financial modeling and forecasting.
What Is SaaS Finance?
SaaS finance refers to financing options that are specifically designed to assist startup and scale-up efforts for software as a service (SaaS) businesses. Because of the demand for convenience in the digital age, SaaS and subscription businesses are popping up left and right.
When it comes to both financial modeling and securing startup financing, SaaS businesses have unique challenges.
You don’t just have to undergo all the normal business challenges of product development, brand positioning, and business development—you also have to articulate how you’ll incentivize loyalty and appropriately forecast your financial position.
Forecasting your SaaS financing position to improve your business model is made exponentially easier with Baremetrics.
Key Metrics of SaaS Financing
Measuring finance for SaaS companies comes down to a few key metrics. These are known as the Bessemer 5 C’s of SaaS finance:
- Committed Monthly Recurring Revenue (CMRR)
- Cash Flow
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLTV)
- Churn and Renewal
These metrics map back to SaaS student finance basics but remain extremely important when measuring your current performance and mapping out your goals.
Stages of SaaS Financing
When it comes to building your SaaS business as a CFO or other executive, you can typically anticipate your business to go through four phases of financial growth. Here’s what to expect:
1. Startup Phase
At the start of your typical SaaS business trajectory, you may not have a lot of data to develop your financial model. You may not even have a product yet.
This phase is largely focused on R&D and turning an idea into a marketable product. Rather than focusing on lead acquisition and sales efforts, you need to create a seamless product that works perfectly and incentivizes customer loyalty.
2. Networking Phase
This is a critical phase of your SaaS business’s financial development, focused entirely on building your customer base. You’ll do this by building a network of customers through referrals and lead generation.
The easiest way to leverage these connections is by making the most of your presence on social networks like Facebook.
You’ll want to understand your customers and prospects most likely to convert so you can appropriately target your marketing and sales efforts.
This stage is usually when revenue starts to stabilize but profitability might not yet be established. Your customer acquisition cost (CAC) might be larger than your average revenue per customer (APRC), and you’ll work toward shifting that balance in this phase.
3. Business Development Phase
At this point, you’re no longer working at a breakneck pace — your product is established, and your SaaS business can operate smoothly. You’ll focus on establishing a marketing strategy, improving your sales processes, and continuing to refine your product for business success.
4. Exit or Ongoing Growth
The fourth and final phase is when your business is fully established. At this point, you’ll either work toward maintenance or steady business growth.
You are no longer solely focused on modeling to increase revenue, but also on improving profitability and retaining customers, and you can dedicate time to more difficult efforts like dunning.
You may also want to position your SaaS product to be attractive to other larger, established businesses so you can sell your SaaS product to another company at a profit.
Securing SaaS Finance
Whether you’re positioning yourself for initial startup investment, a scale-up operation, or reaching the final phase and trying to make your SaaS company attractive for sale, you need to have a clear picture of your cash flow and prospective revenue.
Developing your SaaS financial model helps you articulate your business standing and accurately forecast potential future revenue. You’ll want to track and monitor a range of KPIs, most importantly your MRR, accounting for contraction.
Baremetrics Can Help!
Deciding on the proper SaaS finance structure is more than just securing access to reliable funding — it’s also a way to ensure your company makes its most informed, forward-thinking decisions.
No matter what financing model you’re using for your startup, it’s important to always operate from the most current information.
Baremetrics allows CFOs and finance leaders to forecast important SaaS financial metrics like revenues, retention, expenses, churn rate, and bank balances to demystify SaaS finance and get a clear glimpse into the future.
Improve your SaaS finance model with some professional support. Start your free trial of Baremetrics now.
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