A Financial Model for SAAS Startup: Step-by-Step Guide

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¹SaaS stands for “Software as a Service”. It refers to a delivery model for software applications, where you access the software over the internet. The software is hosted and maintained by a service provider, and you pay for it on a subscription basis, either per user per month or per user per year. Examples of SaaS include G Suite, Salesforce, and Microsoft 365.

Benefits of Creating a Financial Model for SaaS Startup 

1. Better Decision Making: A financial model helps in evaluating different scenarios, forecasting revenue and expenses, and determining the impact of key decisions on the financial health of the startup.
2. Raise Funds: A well-built financial model can be used to convince potential investors of the viability of the SaaS startup and secure funding.
3. Increased Transparency: The model provides a clear and concise picture of the financial health of the startup, which can increase transparency and accountability among stakeholders.
4. Better Communication: A financial model can be used to communicate key financial information to different stakeholders, including investors, employees, and customers.
5. Improved Planning: The model can be used to create a long-term financial plan and track progress toward financial goals.

 Step-by-Step Guide to Creating a Financial Model for SaaS Startup 

1. Gather Data: Collect relevant data such as industry statistics, financial data of similar businesses, and assumptions about future market conditions.
2. Determine Key Assumptions: Identify key assumptions that drive the financial projections, including:
   • For revenue forecast:
     1. list of the company’s SaaS packages;
     2. payment basis: subscription per month or per year;
     3. prices for SaaS packages. Think about if the company will provide a free SaaS package.
     4. the volume of customers on a monthly basis for the first years. The easiest way to do it is to forecast the volume of customers in the first month after the project start and the expected their growth rate for the following months;
     5. the structure of customers based on the SaaS packages.
   • Cost of goods sold (hereinafter ‘COGS’) per each customer (user) if any. It is variable costs that the company has in the case of SaaS package sales. For example, payment to the hosting or server provider for each registered user or customer.
   • List and amounts of operating expenses. These are monthly or yearly expenses the company has, regardless of sales arising. Examples of operating expenses:
     1. payroll expenses of developers and other staff;
     2. payroll taxes and deductions;
     3. office rent;
     4. marketing and advertising expenses;
     5. accounting and financial services;
     6. other expenses.
   • Other key metrics. It can be a corporate income tax rate, payroll tax rates and deductions, and currency exchange rates, etc.
3. Create profit and loss forecast:
   • Revenue forecast: Calculate forecasting revenue, using the data from the Key assumptions.
   • Cost of goods sold forecast: Calculate COGS, using the data from the Key assumptions.
   • Calculate Gross Margin: Calculate the gross margin by subtracting the COGS from the total revenue.
   • Calculate Operating Expenses, using the data from the Key assumptions.
   • Calculate Operating Profit: Calculate the operating profit by subtracting the operating expenses from the gross profit.
   • Calculate Net Profit: Calculate the net profit by subtracting corporate income tax and interest expenses connected to loans if any from the operating profit.
4. Calculate basic financial ratios based on the profit and loss forecast
   • Profitability;
   • Payback period;
   • ROI;
   • IRR;
   • Break-even point;
   • other financial KPIs.
5. Update the financial model if it is necessary. You have a ready financial model for SaaS startup with calculated financial ratios at this stage. Your task now is to understand if you are happy with planed financial result that you have in the financial model:
   • the profit,
   • profitability,
   • necessary investments,
   • payback period, etc.

If you are not happy seeing the full financial picture of the financial model, update it by:

• increasing prises of SaaS packages;
• decreasing COGS;
• decreasing operating expenses;
• increasing the volume of sales.

When you are happy with the financial results in your financial model for SaaS startup (revenue, profit, profitability and payback period) analyze if they are realistic and what action should be taken to achieve these financial goals.

Notes: Necessary investments in the financial model for SaaS startup equal financial losses that the startup has at the beginning of the project before achieves its profitability.

 Case study: Example of the Creation of a Financial Model for SaaS Startup 

Let’s consider the example of creating a financial model for SaaS startup. It will be with simplified assumptions for an easier understanding of the logic of the calculations and financial analysis.

GENERAL INFORMATION:

1. You are launching a startup ‘HR_help’. It is a complex online solution for posting vacancies and searching for candidates for vacancies.
2. Customers will pay for a yearly subscription.
3. You will propose 3 types of packages:
   • ‘Lite’. It is free with limited functionality;
   • ‘Standard’;
   • ‘Premium’ with expanded possibilities.
4. All your employees work remotely, so you don’t need to rent an office.
5. You do not plan to use loans for project financing.

ASSUMPTIONS:

1. Prices:
   • ‘lite’ – 0 USD/ year;
   • ‘standard’ – 50 USD/year;
   • ‘premium’ – 100 USD/year.
2. You plan to have:
   • 400 registrations of new users in the first 6 months after the project launch,
   • then – 500 registration of users till the first year-end;
   • and 600 registrations of new users every following month from the beginning of the second year;
   • 700 registrations of new users every following month from the beginning of the third year;
   • it is expected to lose 30% of active users every year, which use SaaS for more than 1 year.
3. The estimated structure of the packages chosen by registered users:
   • lite – 50%;
   • standard – 30%;
   • premium – 20%.
4. You need to pay the hosting provider 10 USD for every registered user yearly. It is COGS.
5. You expect the following operating expenses:
   • salary for developers and the sale team, including taxes – 8000 USD/month. The developers need to start work a half year before the project launch;
   • salary for other staff – 3000 USD/month;
   • marketing and advertising expenses – 3500 USD/month;
   • other expenses – 2000 USD/month.
6. The corporate income tax rate in your country is 20% of the profit before tax.

PROFIT AND LOSS CALCULATION: Financial model for SaaS startup

Let’s create a profit and loss forecast. Incomes and expenses in this example will be calculated on a cash flow basis. This means that they are recognized in the period in which cash is received or disbursed.

Profit and loss forecast

#	Financial indicator	Period before the project launch ( 6 months)	Jan, Year 1	Feb, Year 1	Mar, Year 1	April, Year 1	May, Year 1	June, Year 1	July, Year 1	Aug, Year 1	Sept, Year 1	Oct, Year 1	Nov, Year 1	Dec, Year 1	Total year 1	Year 2	Year 3
1	Revenue:	0	=6000 +8000= 14000	14000	14000	14000	14000	14000	=7500+ 10000= 17500	17500	17500	17500	17500	17500	189000	=164700+ 219600= 384300	=241290 + 321720 = 563010
1.1	Lite	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
1.2	Standard	0	=400*30%* 50$= 6000	=400*30%* 50$= 6000	=400*30%* 50$= 6000	=400*30%* 50$= 6000	=400*30%* 50$= 6000	=400*30%* 50$= 6000	=500*30%* 50$= 7500	=500*30%* 50$= 7500	=500*30%* 50$= 7500	=500*30%* 50$= 7500	=500*30%* 50$= 7500	=500*30%* 50$= 7500	81000	= ((400*6+ 500*6)*70% +600*12)* 30%*50$ =164700 ***	=((400*6+ 500*6)*70% *70% +600*12*70%+ 700*12)* 30%*50$ =241290
1.3	Premium	0	=400*20%* 100$= 8000	=400*20%* 100$= 8000	=400*20%* 100$= 8000	=400*20%* 100$= 8000	=400*20%* 100$= 8000	=400*20%* 100$= 8000	=500*20%* 100$= 10000	=500*20%* 100$= 10000	=500*20%* 100$= 10000	=500*20%* 100$= 10000	=500*20%* 100$= 10000	=500*20%* 100$= 10000	108000	= ((400*6+ 500*6)*70% +600*12)* 20%*100$ =219600	=((400*6+ 500*6)*70% *70% + 600 *12 *70%+ 700*12)* 20%*100$= 321720
2	COGS:	0	4000	4000	4000	4000	4000	4000	5000	5000	5000	5000	5000	5000	54000	109800	160860
2.1	Hosting cost & other variable costs	0	=400*10$= 4000	=400*10$= 4000	=400*10$= 4000	=400*10$= 4000	=400*10$= 4000	=400*10$= 4000	=500*10$= 5000	=500*10$= 5000	=500*10$= 5000	=500*10$= 5000	=500*10$= 5000	=500*10$= 5000	54000	= ((400*6+ 500*6)*70% +600*12)* 10$=109800	=((400*6+ 500*6)* 70%*70% +600*12 *70%+ 700 *12) *10$ = 160860
3	Gross margin	0	=14000- 4000= 10000	10000	10000	10000	10000	10000	=17500-5000= 12500	12500	12500	12500	12500	12500	135000	=384300- 109800= 274500	=563010- 160860 = 402150
4	Operating expenses:	48000	16500	16500	16500	16500	16500	16500	16500	16500	16500	16500	16500	198000	198000	198000	198000
4.1	Developers’ salaries	=8000*6= 48000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	8000	96000	96000	96000
4.2	Other salaries	0	3000	3000	3000	3000	3000	3000	3000	3000	3000	3000	3000	3000	36000	36000	36000
4.3	Marketing expenses	0	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500	3500	42000	42000	42000
4.4	Other expenses	0	2000	2000	2000	2000	2000	2000	2000	2000	2000	2000	2000	2000	24000	24000	24000
5	Operating profit	-48000	=10000-16500= -6500	-6500	-6500	-6500	-6500	-6500	=12500-16500 = -4000	-4000	-4000	-4000	-4000	-4000	-63000	=274500-198000 = 76500	=402150 – 198000 = 204150
6	Corporate income tax	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0**	= (204150 -34500)* 20% = 33930
7	Net profit	-48000	-6500	-6500	-6500	-6500	-6500	-6500	-4000	-4000	-4000	-4000	-4000	-4000	-63000	76500	=204150 – 33930 = 170220
8	Cumulative Net profit	-48000	=-48000-6500=-54500	-61000	-67500	-74000	-80500	-87000	=-87000 -4000 = -91000	-95000	-99000	-103000	-107000	-111000	-111000	-34500	135720

Notes:

** Amount of accumulated losses should be taken into account in corporate income tax ( CIT) calculation.

*** Losing of registered users should be taken into attention for the following year’s calculation.

FINANCIAL ANALYSIS:

Profitability for the 2^nd year = 76500/ 384300*100%=20% ****

Profitability for the 3^rd year = 170220/ 563010 *100% = 30%

Cumulative profit for the period of forecast = 135720$

ROI = 135720/111000*100% = 122%*****

Payback period = 30 months + 34500/(135720/12)= 33 months******

Notes:

**** Profitability is usually calculated for years that have profit, not losses.

***** Amount of investments is calculated here based on total losses before the profit received.

****** Payback period consists of the number of months when losses were received.

If this example is too complicated for you, you can find an easier example in the article: How to create a financial model for startup.

Basic formulas for financial analysis with examples you can find in the article: Examples of financial analysis for startups to evaluate them.