The rules have changed for SaaS CFOs. Should we do lay-offs? How do we drive to profitability? How do we extend our cash runway?
But where do you start with all of that? In a word, your metrics.
This article will help you move past the accounting grey zone and gain clarity about your SaaS metrics. How can you use automation to better select metrics? Why are they useful, and how can you leverage metrics more intelligently than your competitors?
What is Meaningful Underlying Dynamics (MUD) and why is it important for SaaS?
To make the most of your SaaS metrics and produce lasting profits, keep the acronym MUD in mind. MUD stands for “Meaningful Underlying (Business) Dynamics” and is meant to guide you to the most critical metrics for your unique situation. As an aside, we developed this in our Modern SaaS Finance Forum presentation, alongside Adam Noily, Managing Director and Head of US Technology and Investment Banking at CIBC Capital Markets.
When analyzing metrics through this lens, ask yourself and your coworkers the following questions:
- What are our main profit drivers? Understanding how your profits are generated is essential. This information will be indispensable in everything from pricing decisions to discount campaigns and will impact which metrics you want to take the pulse of.
- What stage of our company’s journey are we in? Mature and established companies often have different requirements around metrics than newly-minted startups.
- Are we operating in a brand-new market? This is a helpful question to ask. For example, it could help you account for higher-than-average quarterly churn figures. Is your product the root cause of the churn spike, or is the entire market losing steam?
It’s always a good idea to conduct this assessment when deciding which metrics to prioritize. But for the sake of simplicity, the ones we’ll be covering in this article are beneficial for CFOs in a broad range of product sectors and industries.
How’s your sales efficiency looking?
SaaS sales efficiency keys you in on how efficiently your business generates new revenue.
- How expensive is each customer? Your customer acquisition cost (CAC) tells you how much money you spend on average to get each new subscriber. A low CAC is often an indicator that you have a good product-market fit.
- How financially valuable is each customer? Your company’s customer lifetime value (CLTV) measures how much revenue you generate from your subscribers before they churn. You should always aim for the highest possible CLTV and the lowest possible CAC.
When calculating your CAC and CLTV, remember that the costs of maintaining existing customer relationships aren’t factored in. You’ll only be looking at the expenses associated with going out and drumming up new business.
Making mistakes with these two metrics can be extraordinarily expensive. If your initial calculations on these figures are inaccurate, the foundation for many important plans and campaigns to follow will be deeply flawed.
Modern accounting software can help ensure that your business operations are always on a firm footing.
The short view on revenue
When dealing with a topic as important as revenue, it can be tempting to get caught up in the final annual figures. Your annual targets are vital, without a doubt. But you’ll be much more likely to hit them if you take a step back and focus on the smaller components of your overall revenue.
Forecasting your monthly recurring revenue (MRR) helps you stay focused on what’s happening in the present moment. How are your customers and prospects behaving on a monthly basis, and how is your overall trajectory shaping up?
In particular, you’ll want to look closely at these specific aspects of your MRR:
- Upgrade and cross-sell MRR: High numbers for these metrics are always a good sign. They mean that your customers are such big fans of your product that they’re upgrading and expanding their subscription to your services. What could be better?
- Downgrade and churn MRR: On the other side of the equation, you want to keep your downgrade and churn MRR as low as possible. These metrics measure how many customers are reducing or canceling their subscriptions.
As a SaaS CFO, you should make a point of staying conscious of your MRR and the various sub-metrics that comprise it. The clarity and direction they offer can make hitting your annual revenue targets much easier.
The long view on revenue
Your annual recurring revenue (ARR) measures how much money your SaaS company has coming in on a longer-term recurring basis. It’s an extremely valuable metric for providing internal motivation and clarity for team members while also helping to secure funding.
A strong ARR is a clear signal to investors and board members that:
- Your user retention rate is high: From your investors’ point of view, this is one of the make-or-break factors that will sway them in one direction or the other. As a recurring revenue business, you must prove to them that your revenue will indeed be recurrent and at least somewhat predictable.
- Customers feel truly devoted to your brand: This may seem similar to our above point about user retention. And it is, but they’re not identical. Customers can stick with a brand without being genuinely devoted to it. You should do everything you can to build a real relationship with your customers: your ARR will thank you.
As a general guideline for your ARR calculations, remember that you should only include recurring payments that have been contractually committed to you, such as regular subscription fees.
Any one-time transactions would not be included in your ARR, even though they technically contribute to your bottom line. It’s this second “R” in the acronym (“recurring”) that makes your ARR uniquely valuable to investors during fundraising rounds, as we mentioned above.
Automation: More signal, less noise
The most effective SaaS CFOs are constantly scanning the horizon for ways to optimize and scale their businesses. Keeping a close watch on your metrics is indispensable for maximizing your revenue.
But when you combine the clarity and power of your SaaS metrics with the revolutionary efficiency of automation, true accounting magic happens. It’s a matter of two plus two, suddenly equaling 400 rather than 4.
To learn more about combining automation with your metrics to achieve maximum effectiveness, check out our recent ebook on SaaS recession management through predictive KPIs.