About seven years ago, Joel York had an embarrassing moment at a Board Meeting. This was before Joel started his influential SaaS blog, Chaotic Flow, and before he (and many others in the industry) really had a firm grasp of SaaS finance metrics and how to report them up to the Board.
So rewind to 2008. “I had just presented the booking plan for the year,” he wrote recently on his blog, “and one of the directors in the meeting said the plan was good, but we really needed to increase our booking rate.”
Increase the bookings goals he had worked so hard to set? This took Joel by surprise. He had thought a lot about the booking plan he presented, and he really believed it was the right plan for the coming 12 months. But then a pit started to form in his stomach.
“I had totally neglected the impact of churn,” he realized.
Remember, this was 2008, and SaaS revenue models were still in their infancy, their subtleties yet to be completely worked out. But still Joel knew he had made a big mistake.
I’m using Joel as an example, but he is far from the only person to make a mistake like this when reporting the financial situation of his growing SaaS company. That’s because Board updates for SaaS companies are hard. Especially in terms of financial metrics. Recurring revenue, churn, acquisition costs, lifetime value ‒ these are all nuanced financial metrics that young SaaS companies must essentially figure out on their own if they want to give their Board the most complete, accurate understanding of their current financial standing.
What Joel learned from his board-room blunder is that SaaS companies are first and foremost judged by their recurring revenue. New bookings will always be important to businesses ‒ including SaaS ones ‒ but only insofar as they relate to that company’s recurring revenue trajectory.
As SaaS expert David Skok points out: Keeping churn low is the key to SaaS success. Your board understands this, and they expect you to understand it when it’s time to give an update on your company’s financial health.
But what else are they looking for? What else do they expect you to do differently from traditional businesses during your next Board Meeting?
We know how important this question is ‒ the Board has a huge impact on your company’s decision-making process, after all ‒ so we talked to Board Members, CEOs and CFOs to get a definitive answer.
And that’s how we came up with this new guide to the essential SaaS Finance KPIs.
There was a strong consensus when we talked to SaaS experts about the financial metrics that really matter. Again and again, they pointed to these 5 metrics:
- Revenue Growth. Future earning potential trumps current profitability. Board Members and investors understand this and are more interested in your revenue growth (including recurring revenue from existing contracts) than they are in pure bookings.
- Cash Flow. Even before SaaS companies are profitable (which can take years), investors are interested in your cash flow. Where are you spending money? How long will your current funding cover expenses?
- Profit Margins. As SaaS companies mature, their unit economics become increasingly important. How much does it cost to acquire a new customer? How much revenue, on average, does that customer contribute over its lifetime? Profit margins give a peek into this equation, and Board Members need this information to truly understand the current health of the company’s financial situation.
- Churn. Churn is the most important business risk for SaaS businesses. Bookings performance can sometimes be fool’s gold if a large portion or customers cancel their subscriptions quickly. Board Members know this and prioritize churn (or, for a more nuanced understanding, the company’s Quick Ratio) over pure bookings.
- Bookings. Which isn’t to say bookings isn’t important. Your Board still cares about how many new deals you are bringing in, they just want to see it in the context of the other KPIs listed above.
If you’re running a growing SaaS company, these are the finance KPIs you should report on every Board Meeting. It won’t guarantee that your business is a massive success, but it will ensure that you’re giving your Board everything they need to assess your financial health.
And help you avoid an embarrassing moment like Joel York’s.