SaaS forecasting is critical for effective decision-making as your business grows. Forecasts allow you to ensure your company is moving in the right direction, but only if you use the right process and tools to build them.
In this post, we’ll discuss the basics of forecasting for SaaS and subscription businesses. We’ll also demonstrate how forecasting works in Baremetrics and compare Baremetrics to other SaaS revenue forecasting options.
SaaS Forecasting Basics for Subscription-Based Businesses
For SaaS and subscription businesses, monthly recurring revenue (MRR) is generally considered the holy grail of all metrics. In fact, maximizing MRR by increasing customer retention and reducing churn is the key to sustainable business growth. That means factoring MRR into forecasting is critical.
That said, you generally don’t want to start with revenue. Instead, you start with assumptions about qualified leads, conversion rates, and other factors that impact MRR. Then you can build a forecasting model that makes sense for your SaaS business.
Sales vs. Revenue
Sales, when expressed in terms of sales bookings or sales targets, are often the contracts won. It is not governed by accounting principles.
If a sales rep closed a contract of $12K for a year, his sales target/sales booking might reflect $12K in that month of contract won, but for accounting the revenue of $12K will be split over the 12 months contract term.
Revenue, on the other hand, is total income including sales, and is the term usually used by accountants. Revenue can include income from other sources like rental income, interest earned on idle cash invested, and more.
In short, sales is a subset of revenue. Sales forecasts and revenue forecasts are often too separate items.
How Baremetrics Stacks Up Against Other Forecasting Options
The first option SaaS startups usually consider for forecasting is spreadsheets. While this might be sufficient at the start, it can be challenging to maintain SaaS financial models in spreadsheets manually as a company grows.
Spreadsheets make collaboration more difficult, and they aren’t easy to integrate with many different data sources. This limits both the accuracy of forecasts as well as the speed at which they can be created.
Instead, SaaS businesses might consider an analytics platform like ChartMogul or ProfitWell, but these platforms only offer basic metrics forecasting options. Baremetrics has advanced capabilities like automated financial modeling, scenario planning, and forecasting using accounting data and SaaS metrics.
Combined with the other analytics and engagement features, this makes Baremetrics a better option than other platforms for most SaaS companies.
SaaS Forecasting with Baremetrics
Here are the basic steps for forecasting SaaS sales using Baremetrics.
1. Create a revenue model
First, you’ll want to create a financial model that’s tailored to your business. The traditional SaaS forecasting approach uses historical sales data and a growth rate assumption, but this generally isn’t the most accurate forecasting method.
Instead, there are other advanced forecasting models to consider:
Lead-driven forecasting uses the number of leads for a given period of time, the customer conversion rate, and the average sale price to calculate a revenue estimate for each lead source.
Lifetime value forecasting leverages the estimated value of the average customer to predict future revenue. There are many ways to calculate customer lifetime value, but one method is to divide the average MRR per customer by the customer churn rate.
Opportunity forecasting predicts which prospects will become customers based on where they are in the sales cycle. You assign potential close rates to different stages of the sales pipeline and estimate the potential value of prospects to predict revenue based on current sales opportunities.
2. Maintain SaaS revenue forecasting
Once you’ve built your revenue model, you’ll want to refresh your data and forecasts regularly. While this might be challenging with spreadsheets or other basic forecasting tools, Baremetrics can incorporate accounting data and SaaS metrics to create revenue predictions in real-time.
This is critical for modern SaaS forecasting, where new data is quickly interpreted to make predictions about an uncertain future — and then used to develop strategies to deal with these forecasts. You can leverage Baremetrics forecasts that use the latest data available to make better business decisions.
3. Model multiple scenarios
Despite our best efforts to forecast the future, running a business will always be unpredictable. That’s why it’s important to model multiple “what if” situations your business might encounter. In short, scenario forecasting is a great way to better prepare for the future.
Baremetrics allows you to input various growth and churn assumptions and make other tweaks to generate overall revenue, MRR, and customer forecasts Using these features, here are three common scenarios you might want to model:
Target scenario: The ideal outcome that you're shooting for, which is usually based on fairly aggressive assumptions.
Base scenario: A conservative estimate of what your business can most likely achieve, which is often based on your average historical performance over the past few months.
Worse scenario: The unlikely scenario that things go very wrong, often due to external factors outside your control.
Improve SaaS Forecasting with Forecast+
Forecast+ allows you to automatically forecast your revenues, expenses, and bank balance, giving you better visibility into your company's future. To start getting ahead of your business’ finances in 2023, schedule a free consultation with our team of experts today.