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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can be a bit intimidating for individuals without sig- nificant financial experience but is a necessity in or- der to avoid under- or overstating revenue in a given period. In addition, analyzing renewal performance through churn and upsell metrics is important for de- termining net revenue retention within the business, which is a significant driver for accurately projecting recurring revenue contributions in a given period from existing customers. future years, which can become a perilous habit to rely on. For SaaS companies, focusing on sales drivers and deals sold on a per rep (or per channel) basis can be critical for any set of projections. In addition to sales, marketing also has a strong impact on model inputs. Depending on how your business acquires customers, understanding unit economics on lead generation and lead conversion is vital to projecting potential market- ing program spend in future periods. While CFOs and financially focused employees are generally driving the creation and maintenance of most financial models within an organization, 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. 4. HEADCOUNT Another common pitfall of most financial models is to use percentage of revenue calculations to drive future hiring plans. While this technique works in certain cas- es, I recommend incorporating a full headcount build and using this document as a blueprint to add addi- tional roles in outer years. This can be a highly useful document for opening dialogue and gathering feedback around potential hires across each functional area within the business. It is also important to factor in commissions, bonuses, health/medical, and any other benefits categories to fully burden compensation fig- ures in the model. Additionally, merit salary increases and promotions are also worth consideration in later years, given their potential expense impact. 5. REVENUE BUILD As previously mentioned, revenue recognition is a crucial concept for any SaaS business. In particular, a significant amount of attention needs to be paid to how recurring revenue is treated in future periods and how other, nonrecurring line items are treated. For example, implementation services for lighter on- boarding processes can typically be recognized in the month in which the business is booked, compared to ongoing professional and support services which are recognized in the period in which those services are performed. Utilizing a "revenue waterfall" of annual contract value (ACV) bookings is typically the best way to model forward period recurring revenue. This 6. KEY PERFORMANCE INDICATORS (KPIs) KPI dashboards are widely used across the SaaS spec- trum but are frequently broken out separately from a company's financial model, making them more a his- torical scorecard than one that can be projected moving forward. By incorporating your KPI dashboard into your integrated financial model, you utilize historical data that is easier to audit and provide benchmark numbers for, which can then be used to tweak and update drivers for projection periods. Regardless of whether you are using a KPI dashboard to drive discussions within board or man- agement meetings or using it as a general performance monitoring tool, aligning your KPI file in conjunction with your financial model provides a more streamlined forecasting solution. To summarize, most companies utilize financial mod- els and forecasting tools in some way, shape, or form. Focusing on the competencies listed above will en- sure that you are getting the most out of your model. Despite being a finance-driven tool, a well-deployed financial model will incorporate feedback from across your organization. In addition, using scenario analysis and alternative operating cases can be an excellent way to test certain variables within the model and allow a business to monitor potential shifts in business perfor- mance based on the results of a certain product line or sub-segment. A strong financial model will help a busi- ness project future performance accurately and aid key stakeholders with data-driven analysis to help support critical business decisions. S 33 SOFTWAREEXECUTIVEMAG.COM DECEMBER 2017

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