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SaaS Financial Model Template: Free and Credible

SaaS financial model software

SaaS Financial Model Template:
Free and Credible

  Adam Tzagournis, CPA · 15 min read

Your pitch deck needs it. Investors ask for it. Your board wants it to justify your strategy. A credible SaaS financial model is not only useful for third parties; it should also guide your company strategy. But how do you build one you can trust?

Hint: use the spreadseet linked at the bottom of this post instead!

The goal: fundraising and actionable insights

Financial models use key business drivers to produce:

  • Cash runway and growth trajectory
  • A 3 or 5 year pro forma P&L, Balance Sheet, and Cash Flow
  • SaaS metrics for benchmarking

Simple enough, right? To get credible results though, approach is everything. The right one will gain the trust of investors and give you insight into your business.

The wrong approach

Before we dive into the right approach for your SaaS financial model, let’s talk about the wrong one. Take this example:

gif of SaaS projections in a spreadsheet with a top down forecasting approach

We see a lot of SaaS forecasts like this. A top-down approach is all too common (if you’ve done this before, no judgment, we’re here to learn!). It’s a convenient shortcut, but investors don’t buy it. They want to know how you arrived at that growth. You need to show your work to prove it to them.

The credible approach

Instead of top-down, think bottom-up. Work backward from the output you’re projecting. For example, customers start off as leads. And those leads come from sales & marketing efforts. So first, create inputs for those activities. Then, model the chain of events (i.e. conversion rates) that get you from prospect to customer.

You’ll use this approach for the fundamental pillars of your SaaS financial model: revenue and headcount. In short, they’re the engine that drives your projections.

Revenue

Investors value SaaS companies on revenue, so focus here first. As discussed, revenue stems from both sales and marketing activities. Even though they both result in prospects, you need separate inputs for each.

Marketing funnel
  • Monthly spend that generates leads/opportunities
  • The cost to get a single lead or opportunity
marketing spend inputs for a SaaS financial model
Sales funnel
  • Monthly new opportunities sourced per sales development rep (SDR)
  • Monthly new opportunities sourced per account exec (AE)
sales lead generation inputs for a SaaS financial model
Customers

If sales & marketing activities are the raw ingredients, customers are the stew (tip: don’t eat your customers, you’ll need them for renewals). Dad jokes aside, sales performance and internal systems will improve over time. Thus, conversion rates should rise and prospect-to-customer cycle lengths should shorten.

Also, don’t forget to model implementation fees and ongoing professional services.

SaaS revenue forecasting inputs

Separate out services from your SaaS product on the P&L. That way, you don’t have a blended gross margin that looks too low. This means investors will give you credit for higher gross margins on your SaaS product.

gross margin split in a SaaS financial model

If you have 2 or more pricing tiers it’s best to have distinct funnel inputs for each one. This lets you set customer acquisition costs, conversion rates, and deal sizes by market segment. Ultimately, this prevents oversimplifying your future customer base and keeps projections realistic.

customer inputs for SaaS forecast
Retention

Good retention rates are the magic of SaaS companies but also the trickiest to model. Here are some tips:

  1. Separate projected customers into cohorts based on their contract start month.

  2. Give each cohort a retention rate.

  3. As their tenure increases, each cohort should have a higher chance of renewal. The longer a customer’s been with you, the more likely they’re getting value from your product.

  4. Raise the retention rate of future cohorts at the start of their contract. Product improvements over time mean that new customers stick around longer.

SaaS financial model customer retention inputs

Headcount

Your SaaS projections won’t be credible if headcount doesn’t track with growth. Don’t think of headcount as just another expense. On the contrary, sales hires must drive your SaaS revenue growth. As mentioned above, the more SDRs and AEs you have, the more prospects you’ll get each month.

The ideal approach here is to map hiring tempo to business milestones. For example:

  • SDRs and AEs based on ARR thresholds
  • Account managers based on customer count
SaaS financial model software headcount dashboard

Unfortunately, most SaaS financial models break down here (not all). Spreadsheets don’t auto-generate hires for you according to a rule set. Instead, enter your best guesses through trial and error. Then, use these ratios to check your work. Without this gut check, revenue per employee may paint an unrealistic picture.

SaaS companies also need product and back office staff too:

  • Product team hires (e.g. engineers, designers, and product managers) based on ARR or the passage of time
  • Back office hires (e.g. HR, accounting, operations) based on total headcount

Don’t forget about managers and VPs for each department:

headcount hiring inputs for SaaS forecast

Finally, expect to tack on “load” of 15–20% on top of salaries for payroll taxes, health insurance, and other benefits.

inputs for payroll taxes, healthcare, and other benefits

Actionable insights

Ok, we’ve laid the groundwork for a credible model (easy, right?). Now, it’s time to interpret the outputs. They should reveal which parts of your business are thriving. Conversely, you may see red flags for parts that need more work. Let’s talk about how to spot those.

Cash is king

One of your model’s outputs will be months of cash runway remaining. In other words, it’ll show how low your cash balance goes and how long it stays that low. A good rule of thumb is to have 18 months of runway on hand.

Capchase analyzed 200 SaaS companies to show cash runway remaining:

Capchase cash runway chart of SaaS companies

Cash runway is useful, but doesn’t tell the full story. The standard calculation takes current cash balance and current net monthly burn. However, last month’s burn won’t be the same as future burn. In short, it won’t account for swings from new revenue growth, or new hire payroll. As the adage goes, past performance doesn’t dictate future results.

Instead, a 3 statement financial model hones in on the direction of the cash burn. Look at the cash line item on your model’s projected Balance Sheet to see what your trajectory is. To take it a step further, we recommend building in prediction intervals. That way, you have a worst-case scenario given certain assumptions.

SaaS financial model software chart showing a cash prediction interval

In doing so, you’ll know if your hiring plan is too aggressive for a given level of growth, or even if you’ll need layoffs. You can also plan for your next fundraising round.

Debt vs equity

Side note: consider debt (the cheaper choice) instead of equity. Use it if you have solid unit economics (more on this below) and a path to profitability. In these cases, it can bridge the gap and buy time for your sales & marketing engine to hit full throttle.

Unit economics

A good SaaS financial model calculates your unit economics. Here are the most important ones.

LTV

Lifetime value (LTV) measures how profitable a customer is to you over their lifetime. As such, it’s dependent on your retention rates and gross margin.

In theory, your gross margin should be at least 80%. This level signals to investors that you serve customers efficiently.

CAC and CAC Payback

Customer acquisition cost (CAC) is the sales & marketing spend to get a single customer. CAC payback is the time it takes for a customer’s contract to “pay back” your CAC.

Your CAC payback should be < 12 months if your annual contract value (ACV) is around $10k. If ACV is closer to $25k though, it should be < 18 months.

LTV : CAC

Think of LTV : CAC ratio as the profitability from your average customer vs. the amount “invested” to acquire them. For SaaS companies, this should be 3:1 or higher.

Remember, LTV and CAC change over time as your business improves. Product improvements and better customer success translate to higher retention rates. Similarly, your CAC will improve as the marketing team finds more effective channels. For SaaS projections, these compounding effects accelerate your growth rate.

Lifetime value of a customer : Customer acquisition cost chart - SaaS metrics
A word to the wise

Keep in mind, these unit economics only make sense in the context of a full SaaS financial model. For example, CAC payback doesn’t account for faster cash recovery with contracts paid upfront. To make matters worse, it ignores collections timing. As a result, your Cash Flow may tell a different story.

The one SaaS metric to rule them all: burn multiple 🔥

If you’re cash flow negative, burn multiple is your most important SaaS metric, full stop. Why? Because no metric captures your growth efficiency like burn multiple does. It’s also simple to calculate:

your net cash burn in a period

÷

net new ARR in that period

For example, let’s say you had a net cash loss last quarter of $2mm. If your ARR grew by $1.5mm, your burn multiple would be 1.3, which is great. To be clear, you’re still burning cash in the short term. In the long run though, ARR will outpace your burn.

In a nutshell, burn multiple is easy to understand and catches all weaknesses. There’s no hiding from it:

  • Churn problem? Net new ARR takes a hit, increasing burn multiple.
  • Sales efficiency issues? New ARR suffers.
  • CAC too high? Cash burn increases.
  • Too many new hires? Again, cash burn increases. The same goes for a gross margin issue or lack of spending discipline.

Here’s a useful rubric for evaluating your burn multiple:

burn multiple SaaS metrics rubric

Cash flow timing

If you don’t project your Balance Sheet and Cash Flow, you won’t have a good grasp of your cash flow timing. Consider these factors:

  • Contract terms for customers delay revenue on the P&L compared to actual invoicing. For instance, a multi-year contract paid upfront means more cash in the short term. Still, you’ll recognize the revenue on the P&L over the contract’s life.
  • Customers may pay you over a few months, and some accounts are uncollectible.
  • Revenue and cash both lag behind marketing spend. It may take 6-9 months before marketing spend produces leads that then end up as customers. This alone could change your cash runway by a few months.

Sensitivity analysis

In reality, only a handful of levers dictate SaaS projections. Your SaaS financial model should highlight the inputs that impact your projections the most. That way, you can focus your efforts on improving them (an 80/20 win). For instance, lowering your cost per lead won’t move the needle if your sales team fails to close deals. Instead, that time and money would be better spent on sales rep training.

Gut checks and other tips

A few structural checks for your financial model spreadsheet go a long way too:

  • Use simple formulas
  • Document decisions and structure
  • Use the Find tool to track down “#REF!”, “#DIV/0!”, “#N/A”, and “#NAME?” formula errors

Also, aggregate detailed P&L line items so your P&L is comparable to public SaaS companies:

SaaS financial model projected P&L

This way, pattern matchers investors can compare your SaaS metrics against industry benchmarks.

Be careful here, since incorrect allocations can muddy the waters. Make sure to get these right:

  • Customer success payroll -> cost of revenue
  • Sales rep payroll -> sales & marketing
  • Commissions -> sales & marketing

Other checks to consider:

  • Match cash on the Balance Sheet to cash on the Cash Flow.
  • Ensure Assets = Liabilities + Equity on the Balance Sheet.
  • Make the model easy to update each month.

Keep in mind, garbage in garbage out still applies no matter how solid your model structure is. Financial modeling is a cross-functional exercise. You have to collaborate with other teams to confirm your assumptions. If you work in isolation, your model won’t reflect your business strategy.

Other inputs

Here are some other inputs to build into your model:

  • Cost of revenue (COGs) – the marginal costs to serve your product to customers. Gained new customers this month? Great, now you need more seats for that third-party tool embedded in your product. In other words, COGs determines how profitable each customer is to you. Your SaaS valuation (and investors) are sensitive to this.
  • Equity, venture debt, and lines of credit – add capital raises to your balance sheet projections. Use them to support your narrative and explain planned strategy shifts.
Capital inputs for debt and equity in a SaaS financial model
  • Customer onboarding period – many SaaS products have an implementation or setup phase. Often, this gap is another chance for customers to churn. If it applies to your company, include the probability as an input. That way, it can tail off over time to show onboarding process improvements.
  • Other expenses:
    • Software subscriptions
    • Commissions (for new customers and renewals)
    • Contractors
    • Rent and office supplies
    • Travel and entertainment
    • Audit, tax, and legal expenses
    • Depreciation and capex

Veritas in numeri (truth in numbers)

To sum up, a credible SaaS financial model bolsters the narrative for your company’s future. But the truth is they’re difficult and time-consuming to build from scratch. Most homegrown models raise eyebrows and don’t support a cohesive narrative. That’s why we’re giving you this free SaaS financial model Google Sheets template. You’ll get credible projections based on your business’s key drivers. It also produces SaaS metrics and pro forma SaaS financial statements for you.

Not convinced spreadsheets are the only tool for the job? Try our software for free instead, it’s built just for SaaS companies.

Need something much easier? Try our new, free drag & drop tool FlowCog Canvas!

Get your free spreadsheet now