There are potentially dozens of key metrics that a SaaS business needs to keep under review – but three key areas will make or break companies.
iplicit's own Financial Controller, Andy Jackson, looks at the vital information that the leadership in a software business should understand to make the best decisions.
Having timely, accurate financial data in front of the right people is all-important to any business. But it’s particularly crucial for SaaS companies, whose success often relies on being able to hit ambitious targets on a timescale provided to early investors.
At iplicit, we have around 50 key metrics at the finance team’s fingertips. But when it comes to making the big leadership calls, the all-important indicators for any SaaS enterprise are smaller in number – and can be grouped under three big headings.
For most businesses, particularly startups, cash flow has to be the number one priority.
Outside investment gives a business some breathing space, whereas a company that’s entirely reliant on revenue will quickly live or die by cash flow. But in either case, the subject remains all-important.
There are two crucial metrics in particular:
There’s a lot that can be done to improve the burn rate and run rate if you’re able to properly analyse the figures. Your finance system should be delivering the data you need to drill down into specifics such as debtors, customers and payment terms, helping you identify opportunities to extend runway and improve cash flow.
For example: How much debt is 90 days old? For a subscription-based business, customers racking up that kind of debt have had three months of service – often a critical service – without paying for it. Unless there are disputes going on, no regular subscription invoices should be lingering in that column.
Automation can help streamline this process. Invoices can be sent out automatically when raised, with a friendly reminder arriving in your customer’s inbox seven days before the payment is due. If the invoice remains unpaid, another automated reminder can follow a few days after the due date, and you can even schedule legal warnings.
All this used to be done manually but employing the right systems and rules enables you to keep the situation under control without devoting time to it. Manual intervention should only be needed when the reminders are ignored and you need to chase payment via more traditional credit control. You won’t know which are those higher-risk customers unless you have the right system to collect and present the data.
Having good data also enables you to track some important trends. Knowing which customers routinely take longer to pay will help you flag potential problem accounts. If, for example, you’re introducing payment by direct debit, it’s likely that you’ll want to start with those accounts.
Keeping this data in view will also help identify broader risks for the business. Slow payers could indicate a churn risk. Perhaps that slow-paying customer is unhappy with the product, or maybe the business has cash flow problems of its own. Either way, that can mean customers downgrading or cancelling their subscriptions – which brings us to revenue metrics.
The figure that people in SaaS obsess over is ARR (annual recurring revenue).
There’s a good reason for the intense focus on that number. It’s the key figure used to put a valuation on the business. But revenue metrics deserve more detailed attention than that.
As well as showing your monthly recurring revenue (MRR), your finance system should be yielding some other important insights. How much of that revenue is coming from new orders? How is it being affected by customers upgrading or downgrading their subscriptions? And how much revenue are you losing to customer churn? All this data should be available to inform business decisions.
Yes, founders need to be hyper-aware of ARR when they think about strategy and the day when they eventually exit the company. But however impressive that ARR figure, nobody cashes out from a loss-making business and that’s where profitability metrics come in.
Investors look at a lot more data than that headline ARR number – and they expect you as a SaaS business to do so as well.
It’s important to track your gross margin and your net margin every month. You might also be measuring your performance against some of the SaaS industry’s preferred standards. The best-known of these is probably the Rule of 40, which says revenue growth rate plus profit margin should add up to at least 40.
There’s also the Magic Number, which shows how quickly a business can expect to recover its customer acquisition costs. (To calculate it, subtract the previous quarter’s new ARR from the current quarter’s new ARR then divide the resulting figure by the previous quarter’s sales and marketing spend.)
If any of these metrics are not going the way you planned, it’s vital to spot it straight away. It might be an explainable blip but it could also be something that requires intervention, to make sure you’re going to achieve profitability on schedule before the investment runs out.
Everyone in this industry expects businesses to make losses as they grow. What investors need to see, though, is a clear path to profitability. And that can only be demonstrated with good data.
You need to be able to review all the above metrics and associated KPIs frequently, without having to wait for lengthy month-end processes or manual intervention.
When it comes to the format and the tool, preferences vary. Some finance people like to use dashboards and reporting packs in the finance system; others will prefer to make use of integrations between the system and Excel or Power BI. The key is that the information should remain complete and accurate in real-time, no matter where you’re accessing it from.
By staying on top of metrics for cash flow, revenue and profitability, you’ll be able to see when the money coming in is going to outstrip the money going out. In the best-run SaaS businesses, you’ll be able to predict the year – and even the exact month – when that will happen, based on the current growth and strategy. And if things drift, you’ll be able to correct course.
That’s not easy – but with confidence in your data, you’ll be better able to inspire similar confidence among investors and customers alike, demonstrating that the business is on course for success.
Want to see how iplicit helps SaaS and tech companies? Find out more here.