From MRR to LTV: How to Craft a SaaS Financial Model that Impresses Investors
here is a step-by-step guide for creating a SaaS financial model that impresses investors:
Understand your key metrics: Before you start building your financial model, it's important to understand the key metrics that investors will be looking at, including Monthly Recurring Revenue (MRR), Lifetime Value (LTV), Customer Acquisition Cost (CAC), and Churn rate.
Gather your historical data: Collect as much historical data as you can on your company's financials, including revenue, expenses, and customer numbers. This will serve as the foundation for your financial model.
Project future revenue: Use your historical data and industry benchmarks to project future revenue. Consider factors such as current customer acquisition and retention rates, and pricing changes.
Forecast expenses: Forecast your expenses for the same period as your revenue projections. Be sure to include both variable costs (such as customer acquisition costs) and fixed costs (such as salaries and rent).
Calculate key metrics: Use the information from steps 3 and 4 to calculate your key metrics, including MRR, LTV, and CAC.
Build a pro forma income statement: Use the information from steps 3, 4 and 5 to create a pro forma income statement, which shows projected revenues and expenses, as well as your projected net income.
Create a balance sheet: A balance sheet is a snapshot of a company's financial health on a particular day. It lists all of the company's assets, liabilities and equity.
Create a cash flow statement: A cash flow statement shows how much cash is coming in and going out of the company. It's important for investors to understand your company's cash position
Valuation analysis: use one of the several methods, such as DCF, discounted cash flow, comparable companies analysis, precedent transactions, etc.
Create a summary and presentation: Finally, create a summary and presentation of your financial model that highlights the key takeaways and potential areas of concern for investors.
Note that, in most cases, a financial model is a living document, it will change as time goes by, make sure you keep it updated. Also, a financial model is the result of assumptions made by the creator and they should be clearly stated and reasonable, investors will question them.
Here are brief definitions of the acronyms used above :
MRR (Monthly Recurring Revenue) is a measure of a company's revenue that is expected to recur each month. For SaaS companies, it is typically considered a key indicator of growth potential, as it represents the amount of predictable, recurring revenue that the company can count on each month.
LTV (Lifetime Value) is a prediction of the net profit attributed to the entire future relationship with a customer. It's a crucial metric for SaaS companies because it helps them understand the long-term value of each customer and make informed decisions about customer acquisition costs.
CAC (Customer Acquisition Cost) is the cost incurred in acquiring a new customer. For a SaaS company, this can include expenses such as marketing, sales, and commissions. It's important for a company to keep its CAC low, as it has a direct impact on the company's overall profitability.
Churn rate refers to the rate at which customers stop doing business with a company. For a SaaS company, churn rate is typically measured as the percentage of customers who cancel their subscriptions or fail to renew their contracts in a given period. A high churn rate can be a major problem for a SaaS company, as it can negatively impact revenue and make it more difficult to achieve profitable growth.
Pro forma income statement it is a future projection of a company's revenues and expenses and it is used to forecast the financial performance of a company.
Balance sheet is a financial statement that lists a company's assets, liabilities, and equity at a given point in time. It's used to evaluate a company's liquidity, solvency, and overall financial health.
Cash flow statement is a financial statement that tracks a company's cash inflows and outflows. It is important for investors to understand the company's cash position.
Valuation analysis is the process of estimating the value of an asset or company. It has different methods, such as DCF (Discounted cash flow), comparable companies analysis, precedent transactions, etc.
Here are ten other popular SaaS-specific acronyms that investors may look for:
ARPU (Average Revenue Per User): A metric that measures the average revenue generated per user or customer. It's used to evaluate how well a company is monetizing its customer base.
GMV (Gross Merchandise Value): A metric used to measure the total value of sales made through an e-commerce platform. It's similar to revenue, but it doesn't take into account any returns or discounts.
ACV (Annual Contract Value): A metric used to measure the total revenue a company expects to generate from a customer over the course of a year. It's typically used in subscription-based businesses, such as SaaS, to estimate the value of a customer over time.
Gross Margin: A metric that measures the difference between revenue and cost of goods sold, expressed as a percentage. It's used to evaluate a company's profitability and its ability to control costs.
Net Promoter Score (NPS): A metric used to measure customer satisfaction and loyalty. It's based on a single question that asks customers to rate their likelihood of recommending a company's products or services to others on a scale of 0 to 10.
CMRR (Committed Monthly Recurring Revenue): A metric that measures the revenue that a company can expect to receive from its customer base in the near future. It's similar to MRR, but it takes into account only committed revenue from customers who have signed long-term contracts.
Gross Retention: A metric that measures the percentage of customers that continue to pay for a service or product after their initial purchase.
DAU (Daily Active Users): A metric that measures the number of unique users who engage with a company's product or service on a daily basis.
MAU (Monthly Active Users): A metric that measures the number of unique users who engage with a company's product or service on a monthly basis.
ARR (Annual Recurring Revenue): A metric that measures the annual recurring revenue generated by a company, typically used to measure the stability of a company's revenue stream and predict its future growth potential.
Please keep in mind, that these metrics are not universally used in all companies and industries, the specific context and company's goals should drive the selection of relevant metrics. Additionally, these metrics are not independent, they are interrelated and should be considered together.
Creating a financial model for a SaaS startup can be a daunting task, especially for founders and entrepreneurs who may not have a background in finance or accounting. However, it's important to remember that building a financial model is an iterative process and it's not a one-time task, the model will change and will require adjustments as the company evolves. With that said, if you are struggling to create an accurate and compelling financial model, it can be helpful to reach out to a consultant for assistance. A consultant can provide guidance on best practices, help you identify key metrics, and offer insight into the type of information investors are looking for. They can also help you navigate the complex financial concepts and terms associated with creating a SaaS financial model. Additionally, a consultant can validate your assumptions and calculations, ensuring your model is as accurate as possible. In short, don't be afraid to ask for help, a consultant can help you to ensure your model is well-structured and communicate your company's potential to investors in an effective way.