Top priorities for SaaS CFOs and finance leaders in 2022 from Ben Murray

Key takeaways

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 SaaS metrics that leaders should monitor in the current financial climate

• Renewal rate metric 

Short-term play for SaaS companies 

• Operate the company
• Watch your cash runway
• Think about what’s beyond the present
• Prepare for the future

Long-term play for SaaS companies 

• Forecast what could affect the company
• Look at opportunities that the org can take advantage of
• How can CFO help the executive team in the next couple of years
  

Best practices to turn variable revenue into ARR

• Run it through retention analysis
• Find if it is predictable and scaling up right 
• Find out if the quality of this revenue is just as good as the contract

Five pillars of SaaS metrics 

• Growth
• Retention
• Margins
• Profit & OPEX
• Efficiency.

SaaS Metrics Framework 

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SaaS valuation metrics

• LTV: Cohort ARPU times recurring gross margin divided by ARR dollar churn  
• ROSE metric: It is the revenue per FTE but more accurate. It shows how much recurring revenue is generated per dollar spent on employees and contractors
• Magic number: The change in quarter-over-quarter revenue times four to annualize it divided by the previous quarter's sales and marketing spend. 

Technologies for financial modeling and KPIs

• Excel 
• FP&A and CPM tools 

Bottom line 

• Have a proper chart of accounts
• Set up the SaaS P&L 
• Calculate the right metrics

Transcript

Introduction to the SaaS CFO

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Nivas: 

Please walk us through more about yourself and also about why you started the SaaS CFO? 

Ben:

I've been in finance and accounting my entire career in the airline industry and then in software. So I started the SaaSCFO.com, about seven years ago, just to share my templates and my forecast models. I did a short stint as a mainframe programmer, in the COBOL programming language. I learned from the veterans. They never started their programs from scratch. They had the hard disk ads back in the day, the same thing for FFP and forecasting modeling. We take different model templates, so I just wanted to share that knowledge that will make it very actionable, make it free and share what I learned in the trenches as CFO.

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Nivas: 

Today, how many subscribers do you have or how big is the community? 

Ben: 

The SaaS CFO has a community of about 43,000 subscribers on my email list. And then I've got another site called The SaaS Academy. And that's where I teach courses and have a lot of videos on SaaS metrics and finance. And I've got a couple of thousand followers on that list. So yeah, building the metrics community. 

SaaS metrics for leaders to monitor

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Nivas:

So today, the topic is around the top priorities for SaaS CFOs, and finance leaders in 2022. And we'll probably get started with the current, macro scenario. What do you think are some SaaS metrics that leaders should monitor in the current financial climate? 

Ben:

We're always looking at cash, good times or bad. But, what comes up immediately as a great metric is the renewal rate metric. Especially for those in the audience, who have annual contracts, and multi-year contracts. May not be as applicable to just monthly invoicing. As we're presenting renewals to our customers, how is that going? Are we seeing anything that would be a red flag, that your customer base may be slowing down their purchases, pushing off purchases, or trying to get discounts? So the renewal rate is a great one. Of course, we'll talk about a ton of metrics here, but I love that one because it is kind of the tip of the spear as far as maybe if we see any early indicators of issues in our customer base.

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Highlights 

• The renewal rate metric is a metric that SaaS leaders should monitor in the current financial climate. 

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“We're always looking at cash, good times or bad. What comes up immediately as a great metric is the renewal rate metric.” 

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Short-term and long-term play for SaaS companies in 2022

Nivas: 

You mentioned cash flow. I think there was an event that I attended a couple of weeks ago, where Ramcharan, the author said “cash is king”, right? What exactly is the situation SaaS companies are going through? What is the short-term as well as the long-term play for SaaS companies?

Ben: 

Yeah, I think right now, I mean this question comes up say ‘if we're going through due diligence or fundraising or exiting right, we still have got to operate our company.’ So thinking about our financial year and as a SaaS CFO thinking about the financial profile, ‘what's working out? What's not working? Where do we have to focus as an executive team, for me, it's just continuing to operate.’ Of course, pricing is a big thing in SaaS. We're now on pricing 3.0 and as I help SaaS companies, it's no longer contracted MRR. We see a lot of variable revenue streams that use transaction processing. So there's a lot of potential there for pricing and expanding our TAM, or expanding our product line. So I think CFOs in the long term, we're getting involved in those decisions and pricing, go to market, which is a lot of fun for a CFO. So I think right now, Finance still operates the company, watch your cash runway. But then think beyond this current kind of SaaS crash. What's going to come after that? And are we prepared for that?

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Highlights 

• Short-term play: Operate the company, watch your cash runway and think beyond, the current SaaS crash. What's going to come after that? Are we prepared for that?

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Nivas:

The long-term play?

Ben:

The long-term play, that C level and CFOs are thinking, not just this fiscal year, but thinking out two to three years. As a SaaS CFO, that's our job, along with the CEO and the executive suite. It is thinking, “What's coming next, What's down the road? What's going to affect our company? What opportunities can we take advantage of?” I don't have the crystal ball to say, things for certain, but it's thinking beyond your current forecast - about what's happening in the next couple of years. So yeah, that's kind of how I look at the next couple of years, to help the executive team. 

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Highlights 

• Long-term play: Think of what's coming next, what's down the road? What's going to affect our company? What opportunities can we take advantage of?

Important metrics to have in place for your business.

Nivas:

In your blogs you talk about not calculating net cash burn instead, calculate gross cash runway. Can you explain net cash burn vs gross cash burn rate? And how do they use burn rate?

Ben:

Yep, there are a lot of different ways to calculate cash burn you have net burn too where you're on a net basis. Your cash went down month over month, by 100k. You've got a million in the bank, so your cash runway is 10 months. A lot of VC-invested funded companies look at that to say “how long are we going to last” so you have that net cash burn. And then I learned in the airline industry, we looked at that gross burn. So if we received no revenue today, no cash today. How long would our cash balance last to cover our operating expenses? So that's just looking at our total operating expenses. We may back out depreciation amortization, and divide that into our cash balance. And usually, that's a much shorter number, maybe that's just a couple of months, three months. So you can look at it on a gross basis, with no receipts, and then on a net basis. Also, I like to look at EBITA as a long-term proxy for cash flow. And we know month to month, of course, the great thing with cool accounting EBITA. I won't match that cash balance change, but in the long run I'll look at EBITA as our cash, our ability to generate cash in our business.

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Highlights: 

• EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the long-term proxy for cash flow.

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Nivas: 

We have a question from the audience. Do you have any best practices you can share on how to turn variable revenue into ARR?

Ben: 

Turning your variable into ARR has a lot of nuances. Can you turn variable revenue into ARR? Because if we think about, say, the strict definition of ARR, contracted ARR or MRR - our customer signs a contract, where they get invoiced monthly for say, $50 a month, $1,000 a month or $12,000 a year, whatever it might be - that's fixed price. Now we see the right usage processing transaction consumption. And to take the most credit for that can we frame that up? Just like contract error or MRR? What's the retention on that? Calculating GDR, calculating net dollar retention, so if it has a profile that's consistent and predictable, even though it's a little bit variable, can we apply the same metrics to that and frame it just as good as contracted MRR? Because that will come up in those valuation discussions. So what I do for my clients is, if they have variable revenue streams, I like to run it through my retention analysis. And what does that say? Is it predictable, and scaling up into the right and then in those discussions with investors or board or potential investors, you're gonna say, “Hey, this is the quality of this revenue is just as good as the contract”. Hopefully, that helps. 

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Highlights

• Turning your variable into ARR has a lot of nuances. Run it through retention analysis and check if it's predictable, and scaling up right. 
• Consider if the quality of this revenue is just as good as the contract.

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Nivas:

It definitely does. When I think of one of the discussions that have been constantly coming up around funding for Series B and above, the growth funding is drying up very critically, for a lot of SaaS companies. Maintaining that runway is becoming very important for them to stay in business. Especially for the next rounds of funding, what are important metrics that CFOs of Series B to D SaaS companies should look at closely? What are VCs asking for today from a valuation metric standpoint? 

Ben:

Yeah, this is a perfect time. Let me show this slide, which will explain it in a nice way here. 

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This is the framework that I implement for my clients, and that I teach in my SaaS metrics course. As we scale from C to those late series stages - you see this red arrow across the top from left to right - that scales with our growth and maturity. So we have five pillars here - growth, retention, margins, profit & OPEX, and then efficiency. So early stage, we're focused on growth and retention. But as we get to say, series A, series B- looking at our margin profile, looking at our financial profile rule of 40, OPEX profile, and then, of course, sales and marketing efficiency metrics. So if you're later stage and say 10 Million and above ARR, you should have these metrics calculated. Even potentially, by your ICP, or product line, not just an aggregate. So this is my guide, and this is my roadmap, depending on your stage, what metrics we need to put in place now, and what will come as we scale the business.

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Highlights 

• Five pillars of SaaS metrics: growth, retention, margins, profit & OPEX, and efficiency.

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Nivas:

Let's say, anyone who is in Series D focuses more on profit & OPEX, and efficiency in comparison to others. Is that what you've been noticing, as well?

Ben:

Yeah, definitely Series D, right? You should have metrics calculated, in all these pillars and be able to explain these - part of your monthly board deck, your quarterly board deck part of your monthly closed process. Now, if you are a seed, maybe it's gonna be growth and a little bit of retention. Series A, then maybe you are starting to calculate some of these metrics. And then post Series A you're probably going to have a lot of these metrics in place.

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Highlights

• For a seed company, track growth and a little bit of retention. 
• Series A, start calculating some of these metrics.
• Post Series A, have a lot of these metrics in place.

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SaaS benchmark report

Nivas:

I remember you did a SaaS Benchmark Report. Do you mind sharing the learnings from deconstructing the SaaS Benchmark Report?

Ben:

As we scale our businesses, for those in finance and accounting, or the CFOs in the audience, we have to put these metrics in place. Next, we need benchmarks, we need guideposts. So I partner with Ray Rike at Revops Squared, and he is producing some of the best datasets in the SaaS industry as far as SaaS financial benchmarks. And so one is calculating these, CAC payback period, and let's just say it's 12 months. Is that good or bad? Then we can benchmark, based on your average contract value, based on your go-to-market motion, and, according to your B2B peer data set, you should be at eight months. So I think, there are a lot of metrics we could talk about there. But really, I think the importance is calculating your metrics, and then two is benchmarking your business. And then you may have your own internal goals and our combination thereof, but it's really important. I calculate that I'm always benchmarking, to see where we are, and where we want to get to. 

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“There are a lot of metrics we could talk about. But I think the importance is calculating your metrics, and then benchmarking your business.”

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Nivas:

Can you share the name again, that you use for benchmark reference? 

Ben:

Yep. The name that I use it? Yeah. the benchmarks reference. So if you go to saaskpibenchmarks.com. That's a site where you can enter right now for free. You can enter your benchmarks and get a custom benchmark data setback. So that's probably the place to go with saaskpibenchmarks.com if you're looking for benchmarks for your business. 

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Calculating top SaaS metrics for your business

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Nivas:

How do you calculate LTV? What formula do you use, given that there are several out there? And also gross margin percentage? 

Ben:

LTV, is our cohort MRR, ARR. So what's the average price that most recent customers are paying us that we just acquired times our recurring gross? Let's say we have MRR ARR times our recurring gross margin. The accepted formula, it's gross margin adjusted. So we take that cohort ARPU times our recurring gross margin, divided by our ARR dollar churn for the classic example of an LTV formula.

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Highlight

• LTV Formula: Gross margin adjusted. Take cohort ARPU times recurring gross margin, divided by ARR dollar churn 

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Nivas:‍

Can you throw some light on how SaaS spends today is impacting gross margins?

Ben:

As you scale, say support, you've got Zendesk, or whatever your ticketing system is. And then customer success has its own tools. Then DevOps has its own tools. If you have some sort of setup, onboarding configuration for your customers, and then DevOps for hosting your architecture, third-party products embedded in your software that make up your cogs ultimately then drop to gross profit. And all these departments have the right spend in their departments and software tools and, it's really important. So everything that should be attributed to those departments should be coded there. We don't just put all tools down in GNA, we've got to call those back to cost centers.

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Highlight 

• All departments have the right spend in their departments and software tools. 
• Everything attributed to those departments should be coded. 
• Don't just put all tools down in GNA, call those back to cost centers.

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Nivas:

If you were to put down three things that the audience should take away from this conversation, what would they be? 

Ben:

We'll stick with a finance focus here. What are the right metrics at the right stage for your business? Understand our financial profile in SaaS. If we start with fundamental financial management - one is the proper chart of accounts. The second is the SaaS P&L. It is important to set up the SaaS P&L correctly. So cogs versus OPEX, what are cost centers and cogs? In OPEX, it's R&D, sales, marketing, and GNA. We have clear and distinct revenue streams in our revenue section. And then third, the metrics. What metrics are relevant to the stage of our business? The pillar framework that I showed, are you in the later stage and should be calculating all these, or are you at an early stage and maybe just focus on bookings and retention? So I think that the big thing is setting that foundation in place, then what to focus on, as a finance leader. You can help your work and help your executive team. But without that, it's very difficult to know where to focus and ultimately where to invest in your business.

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Highlights

1. Have a proper chart of accounts.
2. Set up the SaaS P&L.
3. Calculate the right metrics for each stage of business.

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Nivas:

What is the ROSE metric?

Ben:

It's like revenue per FTE, but it's more accurate. So if we think about FTE that comp can vary among all organizations. Maybe it's 50k at this company and 100k, elsewhere. Think about how much we are investing in our people and our contractors. And that spending is more directly correlated to how much revenue we're generating in our business. Instead of an FTE, it's using employee and contractor-related expenses. So when you calculate that metric you understand how much recurring revenue are we generating per dollar spent on employees and contractors? And that's a really interesting one to calculate for the org. So if you calculate that for 36 months historical and forecasted, you can see it's going to trend as you hire, and then you get efficiency. It improves, and you hire more. So it's a little bit more accurate than revenue per FTE.

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Highlights

• The ROSE number is revenue per FTE, but it's more accurate. 
• It gives recurring revenue generated per dollar spent on employees and contractors. 

Nivas:

What is a magic number?

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Ben:

The magic number is the change in quarter-over-quarter revenue times four to annualize it divided by the previous quarter's sales and marketing spend. So it gets to a revenue efficiency metric. I think it's more applicable to low price points, and self-service businesses, which have short sales cycles where a quarter-over-quarter measurement would be meaningful. But if you're a mid-market enterprise, say, of a 12-month sales cycle, that's probably just too short of a period to really understand your efficiency.

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Highlights 

• The magic number is the change in quarter-over-quarter revenue times four to annualize it divided by the previous quarter's sales and marketing spend

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Nivas:

How would you calculate CAC for an enterprise SaaS company with a long sales cycle - six-plus months sales cycle? 

Ben:

The CAC, with a lot of sales and marketing efficiency metrics, is when the period of measurement line with our average sales cycle. So if you are an enterprise and your average sales cycle is 12 months, I'm going to measure my sales and marketing spend over the last 12 months, and the number of new customers acquired over those last 12 months. I'm going to measure that on a rolling basis every month for the previous twelve.  But if say you had a very short sake sales cycle of two months, then I'm going to look at a one-month and three-month calculation. So really important for sales or marketing efficiency metrics to look at your average sales cycle. And that's the period that you're going to measure.

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Nivas:

Can you talk about the rule of 40? Is it sometimes appropriate to calculate based on FCF rather than EBITA and ARR rather than gap revenue?

Ben:

The rule of 40, in private SaaS, is mostly EBITA and revenue growth. In public markets and public comps, you see free cash flow being used. That's the thing with metrics, people do a little bit differently, but it seems pretty consistent. Some private SaaS folks use EBITA as the profit part of the equation. 

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Nivas:

Is Excel the best tool for modeling and tracking SaaS metrics? Or are there some highly recommended technologies for both financial modeling and KPIs that you recommend? 

Ben:

Excel is still ubiquitous, it's easy to start there. But then you do as you scale and things become more complex, you do want to use a tool to hook up to your accounting system, and pull that data, but this is a really hot market. FP&A, CPM tools, there are tons out there. I’d hate to mention just one because there are many out there. I think two considerations with an FP&A forecasting tool - one, do you want something that's more cloud-based, so you're working in a browser? Or do you want one that has a heavy Excel integration, so you still can continue to work in Excel, do your modeling Excel pull data into Excel? Now I like that platform where the heavy Excel integration. But eventually, you do want to get there because it just your workload will increase so much that it just makes your life so much easier when you can kind of automate some of that stuff.

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“ Excel is still ubiquitous, it's easy to start there. But then you do as you scale and things become more complex, you do want to use a tool to hook up to your accounting system” 

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SaaS valuation tips for founders

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Nivas:

How do finance leaders oversee the product development team? How do we partner and monitor R&D investments?

Ben:

Still trying to figure that out myself. But usually, as a CFO we do need to understand where they're spending their money. What are they investing in? What's the product roadmap? Do we have a product roadmap? I had one R&D leader, who split the time of his team on what's being spent on tech data? What's being spent on new monetization, new pricing, and new features? What's being spent on experimentation? Where are they spending their time trying to understand that and also be involved in those roadmap discussions? What the priority is? Are we doing things because we need to improve retention or are sales asking for a bunch of features? So I think it's really important just to be involved in those discussions to understand, where's that investment being made? Because that's the CFO, we have, a global perspective of the company, what's happening in our pipeline and sales and revenue and expense, and we can kind of put those dots together if we see something that looks unusual.

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CFOs should have a global perspective of the company, what's happening in our pipeline and sales and revenue and expense, and be able to pull those dots together if we see something that looks unusual.

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Nivas:

What is operating leverage cash burn multiple or something different?

Ben:

So operating leverage is, say if you're above 10 million ARR that I would look at in my budget process, even the board would ask about this indirectly. They didn't say operating leverage, but really it's looking at when our gross profit increases, so revenue goes up and gross profit scales with it hopefully. How much of that drop to the bottom line? Or how much drops to EBITA? Does it get eaten all by OPEX? Or, do we move most of that to EBITA? I use HubSpot a lot in my course, as an example, and do a calculation for one of their year-over-year periods. Say 20-something cents for every dollar of gross profit increase. So the higher that number, the higher the operating leverage that you have in the business and the better margins and cash flow you're going to produce.

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Nivas:

With respect to the ROSE metric, Is it calculated only on personnel costs, or also indirect costs, like rent, etc?

Ben:

If you Google the ROSE metric, it should take you to my post. But I'm looking at wages, taxes, benefits, bonuses, commissions, and contractor expenses. So that's what I look to include in the ROSE metrics. So really just personnel-focused versus rent.

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Nivas:

As of now, a lot of companies are moving to a usage-based pricing model. Are you seeing that? And how does that impact these metrics in your view?

Ben:

If we have a lot of usages or variable revenue, we have to adjust CAC payback and LTV formulas. We think about cohort MRR, but then how much variable revenue are we getting with that customer as well? Are there minimums in the contract? Or can we estimate the average variable revenue per customer, and we have to include that in some of our SaaS metrics calculation, so we take credit for that. If you do have significant variable revenue, you've got to adjust CAC payback, you've got to adjust LTV. So the metrics must move as your pricing model changes.

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Nivas:

For companies that heavily rely on partners for product dev cycles and revenues, there are many pitfalls when forecasting new sales timeline shifts. What is a good approach to dealing with uncertainty? 

Ben:

Let's just say, we have a big partner channel, and we generate new apps do revenue from that. That's difficult.  Because those apps are sitting in their CRM system. So what I've seen there is, you do need an active partner manager where they're reaching out, they're understanding the pipeline, maybe they're getting data from those partners, to help us understand what's flowing through their funnel. That's going to help me forecast more accurately because, without that data, we have no clue. Maybe we just have to trend it, which is not always the best. It's that act of partner management, to understand their funnel their pipeline, in as much data. Hopefully, maybe you can get that written into these agreements, and have some sort of data shared with you. So you can understand what's happening on their side and forecast your revenue better.

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Nivas:

What are the top three KPIs you would use as gates or triggers to unlock further spend growth? What are the best leading indicators you look at in an enterprise heavy company?

Ben:

As CFOs we say no a lot and that we want to cut back on the spend. But it is that huge sales and marketing pillar. Do we have efficiency in sales and marketing? Should we invest more, spend more there? What's working and what's not working in sales and marketing. That's an easy one if we have those sales and marketing efficiency metrics calculated by product line or by ICP. Because we want to see if we can to facilitate spend, right? We want to enable the leaders in the organization to invest wisely. Maybe you're looking at retention or we're doing a great job at expansion and need more CS or more account managers. Because that's a successful program. So looking at those metrics, what's working well, and does it make sense to invest more? Or are there diminishing returns depending on your scale? So again, I go back to my five-pillar framework and see what's working, and what's not working. Can we continue to invest because it's going to generate ROI for us?

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Nivas:

I think with that we come to the end of the questions. This was a great set of questions. We are going to drop Ben’s Linkedin profile for everyone. Feel free to connect with us

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Do check us out at Spendflo, we are a SaaS buying platform. We help companies save on their SaaS spends, and help manage and optimize SaaS spends. So if you are looking for a solution to optimize your SaaS spends you know where to go. Ben, as always this has been a pleasure.

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