Software Executive Magazine

December 2017

Software Executive magazine helps software executives grow their businesses by showcasing the business best practices of our readers, executives from established and innovative software companies.

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6 Focus Areas For Shaping A SaaS Financial Model Why KPIs, sales, marketing, revenue churn and build, cash, and headcount need to factor in to your financial model. W I L L C O R D E S Director of Corporate Development & M&A, Infogix, and Founder, Cordes Consulting Incorporating price increases and upselling existing customers are also ways to help mitigate the loss of rev- enue from churned customers. 2. CASH Another important area to home in on is your cash balance throughout a model's projection period. Bill- ings can play a critical role in how your company can reinvest in growth. For example, companies that re- ceive annual and multiyear up-front payments at the onset of a new deal are typically able to drive higher retention rates, as these larger payments reduce re- newal risk versus a company that bills on a monthly, quarterly, and/or annual basis. Multiyear billings also allow companies to recover their customer acquisi- tion costs (CACs) faster and provide the flexibility to reinvest those recouped costs in other areas of the business. To accurately project cash, you will usual- ly need to incorporate and project all three financial statements into your model. 3. SALES & MARKETING Sales teams play an important role in driving accu- rate numbers in the forecast period. Without their feedback, many models resort to relying on historical growth rates to drive revenue and expense growth in hile CFOs and financially focused employees are generally driving the creation and maintenance of most financial models within an organiza- tion, it is important that functional leaders from across the business are comfortable and familiar with the methodologies and assumptions used to drive these models, given their impact on making critical business decisions. Financial models are necessary for a wide variety of cases, including (but not limited to) budget and forecasting materials, evaluating potential acqui- sition candidates, monitoring cash flow or debt, and equity capital raising. To get the most out of your financial models, paying attention to the following six focus areas will go a long way toward maximizing value. 1. REVENUE CHURN While this is a given for SaaS businesses, churn also plays a significant role for legacy software business models that continue to sell perpetual licenses as they look to build their maintenance revenue base. There are many publicized methodologies for improving rev- enue churn, including setting organization-wide goals for churn and investing in additional hiring to create or enhance customer success management functions. W For most executives and business owners, financial models are thought of as robust Microsoft Excel files that typically use historical data and operational variables to provide key information about future business performance. This holds particularly true for Software-as-a-Service (SaaS) and traditional software businesses, where revenue recognition policies add an additional layer of complexity to building out these projections. SCALING & GROWING Framework By W. Cordes SIX FOCUS AREAS FOR SHAPING A SaaS FINANCIAL MODEL SOFTWAREEXECUTIVEMAG.COM DECEMBER 2017 32

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