In comparison with other businesses, Software-as-a-Service (SaaS) companies and subscription business models have specific approaches to running a business. First, they do not make money based on sales. They create steady sources of revenue, as people pay their money to get access to their goods or services regularly. Thus, they have special challenges that need particular planning and analysis.
In contrast to traditional businesses, where the main metrics for measuring the health of a business are revenue and profit, a SaaS company should be interested in more complicated metrics, such as recurring revenue, customer retention and acquisition costs, and profitability. Virtual CFO services help business owners to measure these metrics, to make forecasts and make profitable financial decisions.
The Metrics Virtual CFO Services Track for SaaS and Subscription Businesses
All businesses track their financial performance, but since SaaS businesses have a distinct way of earning money, they need to keep an eye on a different set of metrics.
Professional virtual CFO solutions analyze key operations and financial metrics to get a feel of customer growth, recurring revenues, profitability, and sustainability of the business.
The most valuable metrics include the following:
- Monthly Recurring Revenue (MRR)
- Annual Recurring Revenue (ARR)
- Churn Rate
- Customer Acquisition Cost (CAC)
- Lifetime Customer Value (LTV)
- Gross Margin
- Revenue Growth Rate
Instead of focusing only on profits, the metrics allow the owner of a business to evaluate whether or not his or her business creates sustainable value.
Virtual CFO services track the changes over time instead of analyzing individual monthly metrics, which helps management to uncover growth potential and potential threats to the business.
MRR, ARR, and Churn Rate Explained
Some of these terms might be new to business owners when it comes to the subscription economy.
Monthly Recurring Revenue (MRR)
MRR shows how much money a subscription business receives monthly from its paying customers.
For instance, if a business gets $50 from 100 customers each month, the Monthly Recurring Revenue for that business will equal $5,000.
MRR assists businesses in seeing the constant flow of money on a monthly basis but without taking one-time payments or projects into account.
Annual Recurring Revenue (ARR)
ARR is an analog of the recurring revenue that is measured annually.
It is usually calculated by multiplying MRR by twelve or adding the value of annual subscription contracts.
MRR and ARR explained simply:
- MRR shows recurring monthly income.
- ARR shows recurring annual income.
Churn Rate
The SaaS churn rate is measured in percentage points and shows the number of people who cancel their subscriptions within a particular period of time.
For instance, if there are 500 customers at the beginning of the month and 20 of them cancel their subscriptions, the business will have customer churn.
Virtual CFOs continuously monitor churn because retaining existing customers is often more cost-effective than constantly acquiring new ones.
How Virtual CFO Services Help SaaS Companies Improve Unit Economics
Growing subscription revenue is important, but sustainable growth depends on healthy SaaS unit economics. Unit economics is a metric to show whether there is enough profit generated from each customer to cover the costs incurred in their acquisition and servicing.
Professional virtual CFO service examines unit economics through evaluation of the interaction between revenue, operating costs, cost of customer acquisition, and customer retention.
Rather than measuring only the total revenue, they raise questions like:
- Is it possible to make customer acquisition profitable?
- Is subscription pricing profitable enough?
- Are customer retention activities influencing the increase in revenue?
- Is the growth rate of recurring revenue outperforming operating costs?
The answers to these questions can help the company in effective resource allocation.
Additionally, virtual CFOs create financial forecasts which would show how customer growth, subscription pricing, and operating costs influence the profitability in the future.
Also, an important task is finding trends which might negatively influence profitability in the future.
For instance:
- Increased customer acquisition cost
- Increased customer churn
- Decreased subscription growth
- Increased operating costs
Such an approach allows business owners to take appropriate actions even before the performance becomes worse. Using not historical accounting data but forward-looking analysis, virtual CFOs help in developing a good strategy for the future.
Healthy SaaS unit economics ultimately allow companies to scale more confidently because management understands the financial impact of growth decisions.
Customer Acquisition Cost and Lifetime Value Explained
Two critical SaaS metrics are Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).
Both these metrics together are useful in establishing if customer growth is profitable or not.
Customer Acquisition Cost (CAC)
The customer acquisition cost refers to the cost incurred on an average to get a new customer.
The customer acquisition cost may comprise:
- Advertisements
- Marketing programs
- Sales incentives
- Other promotional activities
- Lead generation costs
Lower customer acquisition cost makes the business more profitable because they can acquire more customers at reduced costs.
Virtual CFOs constantly track the customer acquisition cost to ensure that the money invested in marketing brings in acceptable financial gains.
Customer Lifetime Value (LTV)
The customer lifetime value refers to the total amount of money generated by the customer in his/her lifetime while being associated with the business.
Subscription businesses are better off when they retain customers for long durations since they continue to receive payments without having to spend more to acquire customers.
Higher customer lifetime value shows greater profitability.
Virtual CFOs calculate the customer lifetime value along with other customer metrics.
Why CAC and LTV Work Together
CAC and LTV must always be measured together.
A business might invest a lot of money into customer acquisition, but if the customers continue to subscribe for years, the returns on investment would still be quite high.
On the other hand, low acquisition cost does not make much sense if the customers churn immediately.
Virtual CFOs assess both to ensure proper growth strategies.
Such an analysis allows managers to optimize marketing efforts and profitability.
Why These Metrics Matter More Than Traditional Financial Statements for SaaS
The conventional financial statements are crucial for all businesses.
The income statement, balance sheet, and cash flow statement give information about the current financial position. But subscription businesses need extra information.
The financial statement tells us about the past events. The SaaS metrics give us a glimpse into the future. Professional virtual CFO solutions integrate both conventional accounting data and operational metrics to give a full picture of performance.
For instance:
- An increasing MRR shows better revenue in the future.
- A falling SaaS churn rate reflects better customer retention.
- Higher customer lifetime value gives the edge in profitability.
- Sustainable SaaS unit economics indicate business growth.
Together, these financial management tools help in making strategic decisions for:
- Expansion of business
- Development of product
- Investments in marketing
- Recruitment
- Budgeting cash flows
- Forecasting revenues
Instead of waiting for the results to show up on financial statements to realize profits falling, virtual CFOs spot developing trends ahead of time.
This makes the businesses capable of adapting faster to the changing market conditions.
There are different aspects of financial management for the subscription-based business compared to that of the regular businesses. Although financial statements still hold relevance, they do not entirely describe the performance of recurring revenue, customer retention or sustainability of the business.
Professional virtual CFO services from The Fino Partners helps in understanding MRR and ARR explained, managing SaaS churn rate, estimating customer lifetime value and SaaS unit economics through strategic financial planning.
