As a SaaS founder, understanding and effectively managing your finances is existential for sustainable growth and long-term success. The following budgeting strategies will help you improve your cashflow, forecasting and avoid wasting time that should be spent building your business.
Define Clear Revenue and Expense Targets
The foundation of successful financial management of your company lies in setting clear revenue and expense targets and making a habit of analyzing what happened. If you’re a smaller company, you may think that you don’t need to worry about that habit of actual versus budget early on. If you’re not in the habit of creating an actual versus budget from the early days, it becomes increasingly more difficult to get into the habit of creating one later. It will not only be more problematic for you but also for your department heads and the people that oversee major functional areas.
Start by analyzing historical data, market research, and industry benchmarks to establish realistic revenue goals. Be specific and break down revenue sources such as subscriptions, implementation services, reoccurring fees, or development services. Simultaneously, identify and categorize your expenses, focusing on personnel, tech stack, professional services, consulting, and marketing spend. Clearly defining these targets will provide a roadmap for your financial planning and decision-making processes.
Monitor and Track Key Metrics
To effectively manage your company, it’s crucial to monitor and track key financial metrics. The two most critical metrics for SaaS companies are Cash Runway and Sales Growth. Included in those numbers are Gross Margin, Monthly or Annual Recurring Revenue (MRR or ARR), Net Retained Revenue (NRR), Customer Acquisition Cost (CAC), and Lifetime Value of a Customer (LTV).
When it comes to cash, there is nothing worse than thinking you have enough runway for six to eight months only to discover that you have three. Not having accurate cash flow projections is like flying a plane without instruments. You can see what’s in your immediate vicinity but not what’s coming at you. Then add some foggy weather conditions. That’s what not having a cash flow forecast as part of your budget would do to a company.
That situation may seem like an exaggeration, but that’s a situation many SaaS companies find themselves in. This is why it is important to focus on cash flow and then your P&L.
Adopt a Bottom-Up Approach
A successful budgeting strategy involves adopting a bottom-up approach, where you build your budget based on specific operational components. Start by outlining your business objectives and strategies, and then break them down into departmental or functional level goals. Collaborate with relevant teams, such as sales, marketing, and product development, to gather insights on their resource requirements. This approach ensures that your budget accurately reflects the needs of different areas of your SaaS startup, leading to more effective resource allocation.
Plan for Scalability and Flexibility
One of the defining characteristics of SaaS startups is their potential for rapid growth. As you budget, it’s essential to plan for scalability and flexibility. Anticipate your growth trajectory and the associated costs, such as infrastructure upgrades, additional personnel, or expanded marketing efforts. Consider the impact of fluctuating demand and market conditions on your financials. By incorporating scalability and flexibility into your budgeting process, you can proactively address future needs and minimize potential disruptions.
Regularly Review and Adjust
Budgeting is not a one-time task; it requires regular review and adjustment to reflect the evolving dynamics of your SaaS startup. We recommend Rolling Forecasts for this. They will help provide an accurate indication of where your company is headed. To use rolling forecasts, each month take your actuals and add them to the future budget months to better predict what the rest of the year look like.
Having your actuals built into what’s left of the year is going reflect whether you’re going to hit your numbers or not. This is especially true when considering targets such as:
- EBITDA targets
- Profitability targets
- Gross margin targets
Rolling forecasts become an important budgeting strategy as you scale because they can tell you how to move forward. For example, consider if your company had been running with six to eight employees and an investor dropped extra money into your business. A rolling forecast with your actuals baked in can help you determine what you’re going to do with your headcount and what tech stack you should buy.
Utilizing a rolling forecast can also help resolve the question of where extra cash flow would be the most impactful in situations like closing your A round sooner than expected.
Effective cash projection as part of a strong budgeting process is an essential part of proper financial management for SaaS startups. By focusing on cash with clear revenue and expense targets, key metrics, a bottom-up approach, planning for scalability and flexibility, and regularly reviewing and adjusting your budget, you can optimize resources, make intelligent decisions, and position your SaaS startup for long-term success. Implement these tips to gain better control over your finances and drive sustainable growth in the competitive SaaS industry.