Early-stage SaaS startups have many moving parts, and it can be tough to keep track of everything. A well-built financial model can help you keep your business on track by providing a clear picture of your current situation and future prospects.

There are a few key things that every financial model for an early-stage startup should have. Below, we explain what these are and why they’re important.

How Does a Financial Model For SaaS Founders Differ from a Traditional Business Model?

The biggest difference between a saas startup financial model and a more traditional business is the revenue model. In a traditional business, revenue is generated by selling products or services.

However, in a SaaS business, revenue comes from recurring subscription fees. The subscription-based revenue model means that SaaS startups have a different set of financial considerations to take into account.

For example, a SaaS company needs to consider things like customer churn and lifetime value. However, traditional business models don’t have to deal with these issues.

Importance of a Financial Model for an Early-Stage SaaS Startup

Financial models are the drivers of decision-making processes in a company. Whether you’re seeking investment or trying to optimize your business internally, a financial model can give you the insights you need to make informed decisions.

Additionally, it lets startups estimate their runway (the amount of time they have to achieve profitability), which is critical for early-stage companies. A financial model can also help startups identify potential problems early on and make course corrections before it’s too late.

What Should a Financial Model for an Early-Stage SaaS Startup Include?

As mentioned, a SaaS financial model differs slightly from a traditional business. Here are a few components of a good financial model for early-stage SaaS startups.

Income Statement

The income statement is one of the most important parts of a financial model. It shows a company’s revenue, expenses, and profits over a period of time.

The income statement for a SaaS company should show top-line revenue (total subscription revenue) and bottom-line revenue (revenue after churn and other customer-related expenses).

Global Controls

The global controls are the inputs at the top of the model that define all the assumptions for your business. You have to add the following things here:

• WACC (Weighted Average Cost of Capital): It is the average rate that a company must pay to all its security holders to finance its assets. The WACC for a startup would be higher than for an established company as the risks are higher.
• Pre-Money Valuation: What is your company’s value before the money is invested?
• Beginning Cash Balance: It’s important to know where you stand at the start. The number should be zero if you’re starting from scratch.
• Marketing and Sales Percentages: These inputs help you understand customer acquisition costs.

Revenue Assumptions

A SaaS company’s revenue is recurring, so you need to estimate the monthly recurring revenue (MRR) for your business. To do this, you need to make assumptions about the following:

• Churn Rate: The percentage of customers that cancel their subscription each month.
• Customer Lifetime Value (LTV): The total value a customer brings to the company over the course of their subscription.
• Monthly Recurring Revenue (MRR): The monthly revenue you can expect from a customer.
• Customer Acquisition Costs (CAC): The costs associated with acquiring a new customer.
• Other Revenue Assumptions: You must also make assumptions about one-time revenues, such as professional services or product sales.

Apart from this, you should also consider the following factors for business valuation:

• Total Addressable Market (TAM)
• Annual Revenue and EBITDA Growth Rates
• Regular Revenue Retention Rate
• Gross Margin and Net Margin
• Customer Acquisition Costs and Payback Period

Headcount Assumptions

In this section, you have to enter your assumptions about the number of employees you will have and their salaries. Include the wages in this section.

Non-Wage Assumptions

Which other expenses will you have? Include them in this section, such as office rent, travel costs, etc.

Sensitivity Analysis

Businesses in the SaaS industry are sensitive to consumer and market changes. To account for this, you need to analyze your model’s sensitivity. A sensitivity analysis shows how your results change when certain variables in your model are changed. 

It lets you see which inputs have the biggest impact on your business. For instance, 9.7% of the respondents in a Statista survey said the Covid-19 pandemic led to a 10% to 20% increase in SaaS spending in their business.

While global pandemics are a less likely scenario, other things, such as a change in consumer behavior or a recession, can significantly impact your business.

Financial Model Outputs

Once you’ve entered all your assumptions, the financial model will generate several outputs that can help you understand the health of your startup. A few key outputs to look for are:

• Burn Rate: The rate at which a company is spending money.
• Runway: The amount of time a company has to achieve profitability.
• Valuation: The pre-money and post-money valuation of the company.

Can You Use a Template?

A financial business model template can be ideal for an established business. However, it’s better for a startup to build a model from scratch.

For one, pre-built templates have features that may be unnecessary for your business. That can make the model more complex than it needs to be and harder to understand.

Second, a lot of the inputs in a pre-built model are static. That means they don’t change, even when the business changes. But in a startup, everything is constantly changing. A model that can’t change with the business is of no use.

Numberly: The Ultimate Solution

The aforementioned problems render templates ineffective for early-stage startups. So what’s the solution? A custom-made template.

Numberly specializes in creating custom-made financial models for startups. We work with you to understand your business and build a model tailored to your specific needs.

Since we include dynamic assumptions rather than static inputs, our models are easy to change and adapt as your business grows. To learn more book a call to talk to a specialist.