3 mistakes you're making with financial metrics

👉 SaaS Accounting + Financial Statements

Author

Aleksandar Stojanovic
April 27, 2024 • Read Time: 13 minutes

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WELCOME TO ISSUE NO #06

📆 Today’s Rundown

Happy Saturday! This week I’ve compiled some amazing resources that will definitely impress you.

TL;DR

  • 💰 3 mistakes you're making with financial metrics. (and how to fix them)

  • 👉 Learn about SaaS Accounting

  • 📃 P&L, Balance Sheet & Cash Flow Cheat Sheets

  • My friend Josh Aharonoff launched his new Excel Plugin - Model Wiz and finance pro’s & founders are amazed. So if you’re looking to elevate your career or business, check it out below.

  • I’d love to get your thoughts on this week’s poll. Share your thoughts below!

👇️ Watch: Step-by-step guide for creating an engaging excel dashboard (with free template) by Josh

Just a heads-up - this email’s sprinkled with affiliate links. If you fancy exploring them, it’s a great way to back this newsletter!

Bonus Story

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3 mistakes you're making with financial metrics

(and how to fix them)

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1. Mismatching revenues and costs when calculating CAC Payback Period

CAC (Customer Acquisition Cost) is what you spend in S&M (sales and marketing) to land a net new customer. And CAC Payback Period is the number of months it takes to break even on that new customer.

S&M costs should be lagged by the average sales cycle of the sales engine you’re measuring. And Customer Support costs should match the current period.

The goal is to align the dollars you spent in the past to generate the sales (ARR) you are seeing today.

Examples of lagging by segment:

  • Enterprise sales cycle of 180 days = 2 quarter S&M lag

  • Mid-Market sales cycle of 90 days = 1 quarter S&M lag

  • SMB sales cycle of 30 days = 0 quarter S&M lag

Always Sunny Reaction GIF

Mapping out the lag periods for CAC

2. Relying on Accrual Revenue when making growth decisions

Accrual Revenue isn't actually cash. It's a GAAP based accounting view of the world, looking at when revenue should be recognized for services delivered.

Accrual Revenue will almost always lag cash received from new business - cash you can use to run your business today. Common metrics Accrual Revenue lags are both ARR and Billings.

If you make hiring and spending decisions based on it, you can cap growth and leave money on the table.

3. Using nonstandard definitions for ARR (Annual Recurring Revenue)

Contrary to popular belief, not all "revenue" is created equal. Multi-year contracts with deep first-year discounting or volume ramps over time drive deltas between the first and last year's ARR.

Many companies will claim the larger, exit year Contracted ARR (CARR) as ARR. But CARR will not track to current period GAAP revenue or billings.

Using a non-standard definition of ARR can lead to unexpected mark downs by investors during financing events. Re-defining a key metric like your topline growth can cause frustration.

Argue Sesame Street GIF

Arguing my CARR is really ARR

If you’re looking to elevate your career or your business, check out Excel Plugin - Model Wiz by Josh.

These are the templates that made Josh skyrocket his career & his business, too.

SaaS Accounting

Navigating the labyrinth of SaaS accounting is not for the faint of heart. With a unique set of metrics and principles, it's a world apart from traditional accounting. But for those willing to dive deep, the rewards are substantial, offering a gateway to mastering digital-era finance.

SaaS Revenue: Subscription at its Core

At the heart of SaaS lies the subscription model—customers pay recurring fees for cloud-based software access. This continuous cash flow demands specific recognition strategies over the contract’s life, ensuring financials reflect the true value delivered.

Key Accounting Challenges in SaaS

  • Revenue Recognition: This cornerstone process must align revenue with the period in which services are rendered, avoiding financial discrepancies.

  • CAC vs. LTV: The balance between customer acquisition cost and lifetime value is crucial. Get it wrong, and your capital could evaporate.

  • Subscription Metrics: Metrics like Monthly Recurring Revenue (MRR) and Churn Rate are vital, each with significant implications.

Crucial Accounting Concepts

Deferred Revenue: Often received upfront, this needs careful period-over-period recognition.

Capitalizing Software Costs: Some development costs can be capitalized and amortized, adding layers of complexity.

Revenue Recognition Methods: Including event-driven, straight-line, and usage-based, each method has its implications on how revenue is recognized.

While SaaS accounting is a complex field, mastering it provides invaluable insights and prepares accountants for the nuances of the digital business landscape.

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P&L, Balance Sheet & Cash Flow Cheat Sheets

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Last but not least, the Cash Flow Cheat Sheet is your ticket to mastering the lifeblood of any business—cash. With nine layouts and a 10-step process for detailed statements, you’ll be optimizing your cash flows and management in no time.

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