Potential investors will want to vet your business, before putting money into it. And even after you bag the B2B SaaS funding, they will need the reassurance that their money is being well spent.
You must continuously deliver a realistic picture of the revenue, customer growth, and margins to prove that your SaaS startup has a sustainable future and can efficiently use the funds.
And to keep track of relevant metrics, you need the right performance reporting and monitoring tools. You need a single source of truth that will track all your subscription metrics, while seamlessly integrating all the legacy systems and processes.
Subscription management solutions that are tailored for SaaS businesses are what will help paint a better picture of your company’s financial health on a day-to-day basis. It does so by automatically sourcing and analyzing all your subscription data, from multiple platforms such as the CRM, ERP, and e-invoicing platforms.
Want to know which metrics to report and how to monitor growth and tackle the challenges that come with scaling or raising funds? Then, this article is for you.
Why should SaaS businesses track KPIs and metrics?
A CFO may know his books and can retroactively look at actual revenue, cash in the bank account, deferred revenue, and so on. But this is not very relevant (or plays a very small part) in improving the valuation of your SaaS or a subscription-based business.
What you need is complete visibility into bookings and subscription metrics that highlight the economics of the business to avoid a busted VC deal.
For example, if you track the growth in Net Retention Rate of your SaaS business and find it to be more than 100% then you could potentially achieve up to a 6x increase in valuation.
So, along with the billing software and CRMs that give you historical data, use a subscription management solution that automatically delivers accurate forecasts and saves time spent on mundane tracking and analysis.
Top KPIs to convince VCs of your business’ potential
Once your B2B SaaS business reaches an ARR of EUR 100K to 3M, know that it's time to reach out to your friendly neighborhood subscription management providers.
While evaluating these platform vendors, ensure that they have the capability to track and report foundational metrics such as CMRR and recurring revenue. That is what the venture capitalists (VCs) are going to be interested in.
On that note, let's deep-dive into the top KPIs at the booking, subscription, and financial level, to track.
Committed Monthly Recurring Revenue (CMRR) is a measure of the revenue earned from when a customer signs up for the service to the end of the subscription. This offers a future outlook (long-term and short-term) on what your customers will actually pay. And it transparently showcases the net inflow and outflow of subscriptions for your SaaS business.
Here is the formula for it.
CMRR = (Existing MRR + New business bookings + New upsell bookings) - Downgrade bookings - Churn
Annual contract value (ACV) stands for the average value of the contract (recurring revenue plus one-time fee), secured from each client, across a year. SaaS businesses that charge a one-time sign-up fee at the start of the association with each client, will find that the ACV of the first year is higher than that of subsequent years in multi-year contracts.
ACV = Total value of the client contract / Total number of years in the contract
- Gross and net churn
You must have heard this one before: acquiring a new customer is up to 25x more expensive than retaining an existing one. This is why it's important to track gross and net churn to understand why customers have stopped using your product or service.
Churn analysis can also help you figure out if a single event has caused customer attrition (hard churn) or if it should be attributed to multiple events (soft churn or contraction).
The churn rate can be calculated with the following formula:
Churn rate = (Customers lost within a time period /Total customers at the start of period) x 100
What's the dollar value of your customer? Customer lifetime value (CLV) helps answer this question. CLV refers to the effective revenue that your business stands to make from one customer in the duration of your association.
It predicts the net profit attributed over the whole period of the relationship with a customer. Once you arrive at this figure, you will know how much to spend on customer acquisition to stay profitable.
CLV = Average monthly revenue from each client / Churn rate
All your efforts to bring in a new client will go in vain if they do not stick with your SaaS solution. To avoid such a scenario, you measure net retention rate (NRR) and find out what percentage of recurring revenue from existing customers stays with you, over a certain time.
A high NRR shows that your business will continue to grow even if it doesn't add new clients, which improves your standing with investors.
NRR = (Total Revenue + Revenue from expansion and downgrades – Churn) / Total Revenue
Gross Revenue Retention (GRR) is similar to NRR, except that it doesn't take into account the benefits secured from revenue expansion.
GRR = (Total Revenue – Churn) / Total Revenue
Monthly Recurring Revenue (MRR) refers to the value of revenue that your business receives from clients, every month, from when they start paying for the service. This helps improve operational understanding and predict what your business revenue will be in the future.
The formula for monthly subscription plans:
MRR = Number of subscribers under a monthly plan x Average revenue per user (ARPU)
The formula for annual subscription plans:
MRR = (Annual plan price/12) x Count of customers on the plan
- Usage MRR
This metric puts a value on how much of the SaaS product has been used in a particular month. It can be calculated by multiplying the cost of each transaction by the number of transactions in the month.
For example, assume that yours is an eSignature company that charges $1 for each document signed. In Feb 2022, your client had 100 documents signed. So the Usage MRR is:
100 x 1= $100
If usage fees are a big part of your recurring revenue model, then you must include them in the overall MRR.
Since recurring revenue can be quite volatile, to highlight the difference in revenue, it is important to calculate the combined MRR and separately arrive at the usage MRR.
Customer acquisition among SaaS businesses is extremely competitive. Hence, your sales and marketing teams need to be very mindful of how much they spend to bag a new client.
By tracking the customer acquisition cost (CAC), you can find out whether or not it's sustainable to spend that much money on sales and marketing.
CAC = Total marketing and sales spends / Count of customers acquired
- Cash flow
Cash on hand is the amount of money your company has at any point in time. This is an important financial metric that determines how your business is performing. Also, your startup should have 12 to 21 months’ worth of cash to ensure the smooth running of operations. This is known as the months of runway.
You need to regularly assess whether, considering the current performance and revenue forecasting, the cash flow will last your business to achieve pre-decided milestones.
Months of runway = (Starting cash balance / Monthly amount needed to run your business) - Revenue.
Some of the other cash flow metrics to track are:
- Total available liquidity
- 30-day and 13-week operating cash burn
- Revenue recognition: It's not good enough to have bookings if they are not converted into revenue. You need to make the connection between cash flow and revenue, based on a set of complex rules and guidelines.
Instead of running a huge and unreliable excel spreadsheet or juggling multiple inefficient systems, choose to track and analyze booking and subscription metrics with an intuitive subscription management solution.
How subscription management solution can help track business goals
Less than a decade ago, CFOs didn't have to actively or regularly track and analyze business metrics, for several years after a funding round. This is because companies used to grow quite slowly.
Much has changed since then, especially with the advent of SaaS businesses.
Firstly, as growth happens at a hyper-accelerated pace, your company's financial and business health needs to be monitored on an hourly, or at least a daily basis.
Secondly, SaaS performance measures and KPIs are mind-bogglingly complicated. Scores of these metrics need to be tracked minutely to ensure the right projections can be harnessed for timely course corrections.
Owing to both these reasons, you need to be in complete control of your SaaS metrics. Else, you face risks of revenue leakages such as missed renewals, up or down-sell, contract changes, etc.
What can help in this matter is a subscription management solution that can deliver:
1. Offers data consistency
Is your sales revenue different from revenue reported on your financial statements? Or are there different churn numbers floating around in your organization? If yes, there is likely a gap between the services actually sold to customers and what is reported. In SaaS businesses, no matter how strong your cross-functional collaboration and communication, there can be discrepancies in each team’s view of customer-specific revenue, spending, and behavior. By offering a single source of truth, a subscription management tool will reduce such data inconsistencies and reduce the time invested by each team to track the same metrics.
2.Recognizes revenue properly
For SaaS businesses that are thriving, and experiencing increased transaction volumes, accurate revenue recognition is a tricky but super essential process. Sometimes, there is a significant gap between correct revenue recognition and assumed revenue. This can become problematic when you are asked to re-state your revenue. After all, there is nothing worse than telling your board and investors that you had shared the wrong figures for revenue recognized or revenue forecasted. You may avoid such scenarios by banking on Younium to automate the generation of journals for straightforward reconciliation with the general ledger.
3. Improves the finance team’s productivity
28% of businesses spend about 4 to 10 hours on subscription-related reporting. This just won't do when you want to double ARR. The scalable platform offered by Younium does away with manual admin tasks of tracking and analyzing subscription data. Thus, it allows your business to grow 2- 4x without overspending on staffing your finance team.
4. Reports growth numbers via a customizable dashboard:
VCs tend to have very clear B2B investor reporting expectations. They will have a laundry list of data that they want from you to gain a better understanding of the current and future state of your business. Younium offers access to all kinds of rich and detailed data, from one-time fees, usage fees, discounts, and milestones to NRR, MRR, and CLV. These numbers are automatically updated in real-time, pulled from different sources.
5. Integrates with finance systems:
Younium is the perfect example of a one-click solution that offers many APIs and plug-and-play connectors for seamless integration with finance systems.
Once all the subscription data is collated within a subscription management solution, you can easily streamline and automate the billing and subscription workflow. For example, you could tightly manage complete accounts receivable in Younium with support for e-invoicing, card payment, open banking, and tax compliance (with TaxJar). Then, by the end of the month, you could take three sub journals (invoices, payments, and revenue recognition) into your General Ledger or you can post the invoices via a connector to your financial system.
Having all the systems connected makes it so much easier for your SaaS business to track the data better. To get the highest valuation possible, you don't have to spend an excessive amount of time assembling reports anymore. Just log in and manage your ready-to-go SaaS metrics in Younium. Want to see the B2B investor reporting magic unfold in front of your eyes? Just click here for a personalized product deep dive into your case with one of our experts