Building a financial plan which helps you manage your business

Markus Grundmann

Partner, Senova

About the speaker
Markus got hooked on startups when he joined one during the .com boom. After the bust, he worked in R&D teams at SAP and IBM, then later ventured into consulting. As a consultant he focused on remodeling technology organizations within German blue chips. He is investing mainly in SaaS businesses since 2011 and is a Partner at SaaS VC fund Senovo. Among others, he has backed the teams behind Falcon.io, tado, Dedrone and Quantilope.

Conference: SaaStock 2018

Markus gave a brief overview on his company - Senova which is focused on investing in Series A stage SaaS companies across Europe, typically between 2 - 5 million ticket size.

He started off the session on Financial Planning with a quote.

You’ll land where you’re headed: Building a financial plan helps you manage your business

He faced a lot of difficulties as an Investor - finding the right balance of communicating what you want to do financially but also what the operational implications were, the benchmarks and how to measure them. His company set out to take their financial plan (step by step approach) public which is now a downloadable template you can use for your own business

Senovo B2B SaaS Financial Model 3.0

B2B SaaS Financial Model v3.0

Sales Funnel

The sales funnel leads to customers which in turn leads to revenue. The main cost section is the personnel that you hire.

Start with the Sales Team

Generally, investors invest in or are biased by Enterprise-type cases so a lot of the sales efforts are done by outbound or inbound call centres or field paste activities.

Firstly, you need to model how your hiring will work. It will take longer than anticipated and you need to allow for a ramp up period.

E.g. - If you have a Sales funnel with a set of leads in a 3-6-9-month period, it is suggested to gradually ramp it up.

The complete 'Sales funnel' should consist of below steps

A typical example would be to qualify the lead using the BALT model (Budget, Authority, Lead and Timing). Go through a second stage {POC} and then a third stage which would be the {Closing}.

It is also very important in these stages to consider the duration of the sales funnel.
When you generate 100 leads - These 100 leads won't convert into customers in the next month. You need to measure the period and take that into the template.

Model Customers

Segment Customers

In 90% of the cases, investment companies don't segment the customers. In many cases, a typical sales model would be - a small business goes for the premium approach (where you go upmarket and end up in the 5k space) and the churn rates over these different types of customers get aggregated into one average and these are not very meaningful.

It is recommended to have an SML(small-medium-large) customer process to track the customers in different revenue segments.

When you have down-sells, up-sells, churns, etc and you need to put them into different segments, so you can clearly identify when you have

• lost a customer
• upsold a customer
• customers deciding to downgrade to a smaller version of the plan

Revenue

This flow should carry through to the Revenue

You can split the revenues from the bottom up - by customer segment (SML). Also, another good point of segmentation is by industry from which the customer is coming from. Then you can split the revenue by Type - obvious type is the Recurring revenue component (MRR). Sometimes there's a setup fee, sometimes on top service revenue's because the customer does require some hand holding (these are billable customer success efforts)

The last portion which is often seen done correctly but is incredibly important (this is on the Revenue side not cash flow side) - recognize the revenue correctly.
Example - If you have a one-year upfront contract, you should recognise the revenue is for each month in that year and not for the lumpsum amount upfront.

KPIs to track

Typical KPIs are as shown in the image above.

• CAC Payback Rate
  The most important KPI for early SaaS businesses is the CAC Payback rate (How quickly you generate the money back that you used for marketing and sales.)
  Example:
  If you have a 100% sales and marketing budget that you spend completely on the first day of the first month (when you have a 3 month sales cycle). At the end of the first quarter you have your complete sales and marketing cost back. Again, in the second quarter you can spend it. In the third quarter you are going to have the payback for the first and the second quarter so that doubles the budget and in the fourth quarter you have quadrupled the budget. So, without any financing you get the hockey stick growth environment and hence CAC Payback rate and not customer lifetime value is the most important metric because it has lesser assumptions and helps you to manage your business in a very pragmatic way.
• New MRR and Trends
  Basically, these are the gains and losses - These are very obvious and important KPIs.
• New MRR per Sales rep & Quota attainment
  Sales efficiency side has the 'New MRR per Sales rep' KPIs which is a Key efficiency metric. Quota attainment is more tracking when you have a compensation scheme for your sales employees - How that scheme is going to play out? Whether it's worth their while? Does your budget make any sense? If you calculate that together you should be able to create a good scaling company about four times the revenues than you spend on a sales rep. This scenario is valid for traditional inbound/outbound Telesales process (unlike marketing heavy businesses). For field sales efficiency will go down a bit (between 3 & 4 times the sales rep's cost)
• Gross Margin per customer
  Pure SaaS companies, particularly use this metric. As they have some type of workflow for customers, which they automate and help to achieve it. Gross margin per customer will probably be around 90-95%. But some SaaS businesses have an infrastructure component. They typically process a lot of data and they crawl the web. Their gross margin is often way lower (between 30-50% revenue). In these cases, you should go to the simplified revenue based KPI - It will give you a wrong indication of whether your business is working or not.

Team

It is quite similar in philosophy to the customers at the end of the day. The ideal way to do it is to have sales, marketing, development teams and at the very minimum - model 2 or 3 levels for each team.

Example

• Account executive & SDR at the Sales Team
• Lead & regular developer on the Dev team

Take your time to model out the different layers, if you have everything together it will be impossible to see in a specific hire whether you are working in line with your budget or not. This next story will evolve over time. The hires will get more in number. But in a different situation if you are in a one-million revenue type situation - you probably hire people for 50-65k. If you are in a 10-20 million revenue company it might be different.

In a typical time frame of a budget (3-5years) the Budget tells you where you want to head and if you deviate to the left or right, you can consider if that will deviate the entire goal or whether that is something you can adjust a bit to or you just accept it and chart a new path.

Take into account that your team values increase over time.

For heavy incentivised sales forces take into account variable pay in combination with reasonable quota achievement.

Example - Typical split for a sales rep would be 50% fix component 50% variable component and he has to generate 4-5 times his cost in revenue. Sales force on average would be 80% of quota attainment.

These are some of the benchmarks that you will enter into the template if you don't have any other indications, and then as the numbers start to come in you can adjust it to see how that is working out.

Cash Flow

In many cases the financial planning just ends with the EBITDA. In a SaaS business with upfront payments EBITDA is totally meaningless. EBITDA can be heavily negative over a certain period, but because you have all those upfront payments you get flushed with cash and you don't consider fund raising for the next 6-9 months. It would not make sense to do the fund raising because you have the capital. But the danger is - if you have different payment terms - you might have

• 3 monthly contracts or
• 1-year or 2-year contracts

You have to model them separately. These will probably co-relate in some way to the size of the customer. A smaller customer might have 3 months contract duration while enterprise type customers (more inclined to spend) will be 100K ACV & above may be more inclined towards 18-24-month contracts. So, model them separately.

Optimize for upfront payments

The reason upfront payments are basically free financing at the end of the day. If you have a 2 million run rate business, it is obviously beneficial if you get the 2 million upfront rather than in instalments of 200K.