Here’s How You Avoid Bad SaaS Financial Modeling in 2023

In my nearly ten years of experience in the VC industry, I’ve seen many SaaS founders with bad financial models. These models are either unable to tie assumptions to real-life data or just too bare-bones in nature.

A financial model is more than just a bunch of numbers and projections on a spreadsheet. It’s a crucial instrument for raising capital and projecting optimal financial milestones for every startup.

Let’s talk about what a good SaaS financial modeling approach looks like, so you don’t get beat up in your next (or very first) board meeting.

What is a SaaS Financial Model?

A SaaS financial model is a “record of truth” that uses historical insights to make projections about a SaaS organization’s future financial performance.

A SaaS financial model contains data on a company’s expenses and earnings in the past, as well as assumptions that’ll guide the team toward hitting its projected KPIs. Essentially, it’s an operator’s road map to a preferred business outcome.

It’s important to note that a SaaS financial model is not strictly finance-oriented regarding the kind of data it contains. You can always include non-financial data (employee count, for instance) if it has some impact and connection with your organization’s financials. You just have to take time to analyze your startup to find the correct data to include.

What’s Included In a SaaS Financial Model?

A traditional financial model takes a more straightforward approach. But with SaaS, there’s always the need to factor in the complexities of subscription-based products—such as churn rates, LTV, and sales cycles—and how they impact revenue predictability.

A standard SaaS financial model should include the following:

Inputs

• Hiring Plan and Budget
• Revenue Model and Assumptions

Outputs

• All Three Financial Statements—P&L, Balance Sheet, and Cash Flow
• Summary with Unit Economics

Hiring Plan and Budget

80% of your expense base is likely to be associated with your team. That is why it’s important to spend a lot of time really thinking through your hiring plan in the model. 

The SaaS Modeling Template we use has a very simple tab that allows you to input each employee (current or future) alongside any anticipated raises, bonuses, turnover, etc.

It’s also very important to scope out other expenses you may incur, especially anything that grows either linearly in a step function alongside either headcount growth or revenue growth.

Revenue Models

Your revenue model should include existing customer revenue, anticipated revenue from your pipeline, and then a model and revenue beyond your pipeline horizon based on logical assumptions.

A revenue model gives you a view of organizational revenue over time and the churn or expansion that has occurred within that period. You’ll also be able to make projections on future revenue growth based on information from revenue models.

Financial Statements

Financial models need to have all three financial statements embedded within. Too often I see financial models with only a P&L statement.

At the same time, the most important thing I hear from founders is…cash.

An organization’s cash balance is found on the balance sheet statement (which needs to flow through a cash flow statement to be correct).

A model with a P&L is certainly easier to manage. But if you’re a startup that cares about cash, I recommend a model with all three statements.

The P&L Statement

The Profit and Loss (P&L) statement is a summary of your organization’s cash flow during a specific period. It encompasses your revenue, cost of goods sold (COGS), and expenses.

The Balance Sheet

The balance sheet shows all of the organization’s assets, liabilities, and equity. Again, cash is most likely the main asset you care about. You should also care about things like accounts receivable, accounts payable, and deferred revenue.

The Cash Flow Statement

The cash flow statement factors in everything from your P&L and balance sheet to arrive at your cash flow by type. This is not part of the model that you would touch, but it is a calculation flowing through to your end in cash balance.

Summary with Unit Economics

Top it all off with a summary tab that flows the most important things from other tabs to explain in an easy-to-understand way. This includes high-level financial statements.

Unit economics details an organization’s revenue and expenditure on a per-unit basis. This helps founders and investors understand profitability at a granular level.

The unit economics for a typical SaaS business encompasses metrics like Lifetime Value (LTV), Customer Acquisition Costs (CAC), payback period, and CAC:LTV ratio.

For example, with sales reps, you’ll have to detail how much you’ve invested in each sales rep and how much gross profits they’ve turned in cumulatively over time. Leveraging unit economics will help you predict the payback period for each person.

These metrics are key indicators of a SaaS organization’s operational efficiency. If you aren’t tracking them, your financial model will not provide the valuable and actionable data you need for organizational success.

Best Practices for Building a SaaS Financial Model

A SaaS financial model doesn’t need to be too aggressive. At the same time, it shouldn’t be too simple (and passive). So, how do you build a financial model that strikes that perfect balance?

1. Only Model What You Can Measure In Real Life

In terms of complexity, model only what you can measure in real life. A financial model contains several assumptions. However, you need to have systems in place for tracking and confirming these assumptions.

For a SaaS organization, you should be able to measure your sales rep’s productivity, retention, and upsell. If you can’t do that, you likely have an operations problem, not a financial model problem.

2. Don’t Lose Version Control

Version control is mission-critical, especially for first-time founders.

When you send out a model, always make a copy and give it a clear name (include the version number and the date it was presented to the board). While you technically build your budget once a year, there’s always the need to re-forecast. So, you’re changing the model regularly and generating multiple versions. 

Keeping well-labeled copies allows you to quickly identify what version you presented to the VC board and makes it easy to compare each model against your actuals—what you thought was going to happen vs. what actually happened.

3. Take Advantage of Historical Information

When building your financial model, including historical information from the previous year makes your job much easier.

How exactly? 

When you make projections, investors always want to know the basis for your predictions. They want to know how realistic your predictions are, based on what has happened before. Including historical data cuts down the time for due diligence and makes the model more presentable.

4. Find the Balance Between Being Realistic and Optimistic

It’s common for founders to present aggressive projections during fundraising conversations. It’s okay to be optimistic, but are you really going to triple revenue in the next six months? Don’t you think that’s a bit much?

This tendency is not always the founder’s fault. It’s common to face a lot of pressure from your board members. But the problem with accepting unrealistic or overly aggressive projections is you almost never hit the plan.

When you miss a plan, you lose trust…and eventually, support. Always pay attention to your data and industry benchmarks. That way, you can make more realistic projections and boost your chances of success.

Use This SaaS Financial Model Template to Get It Right 

We understand that creating a SaaS financial model can be an overwhelming task, especially for first-time founders. It’s all too easy to “get it wrong” at this stage. 

At Graphite, we’ve built hundreds and reviewed thousands of financial models for startups in various industries. We’ve distilled our experience into a financial model template you can download to understand what you need to know and also know when you’ve made a mistake.

Every organization is unique, and there is certainly no canned solution for financial modeling. Our financial model template is a great place to start. When you’re ready to take the next step and create a financial model that matches your unique goals and objectives, don’t hesitate to reach out to the Graphite team.