As part of my job at Adaptive Insights, I meet regularly with FP&A peers working at software as a service (SaaS) companies. Their questions often echo the same concerns: How can I forecast revenue more accurately? What are the metrics that matter? Is there a way to beat back the time demands of revenue forecasting?
One reason these questions arise so frequently—in the weekly FP&A roundtable we host, for example, and during meetings with prospective clients—is that forecasting revenue for a SaaS business is inherently more complicated than for a traditional revenue model. At almost any other company, when you sell $10 worth of products, you record $10 worth of revenue—full stop. But anyone who’s wrestled the financial planning process at a SaaS company knows revenue recognition isn’t as straightforward when your customers are buying a subscription.
I, of course, can speak firsthand on this subject. Here at Adaptive Insights, I work in the trenches of a SaaS company. The FP&A team at Adaptive Insights uses our own cloud-based tools to forecast revenue. When my FP&A peers ask for advice on how to make the process better, more efficient, and faster, I tell them to start by focusing on these three areas:
Lucky are the traditional companies that can simply forecast sales. At a SaaS company, revenue forecasts comprise three layers: new bookings, renewals, and services. That’s because when a new customer starts a subscription, you have to account for that new booking when the contract is complete and also tack on professional or ancillary services as the contract unfolds. You also have to account for the likelihood of that customer renewing—hopefully multiple times.
Advice: If you’re forecasting booking renewals in a spreadsheet-based environment, odds are you’re doing quite a bit of Excel gymnastics. I used to have to do this, before arriving at Adaptive Insights. I would spend an hour or more combing through Salesforce, pulling data on all of the renewal opportunities on the horizon, then manually copying and pasting that data into the financial model. Even worse, when someone from the sales team wanted the details on those renewal opportunities, he or she would have to chase me down to get the right data. It was a time-intensive, error-prone task, and moving to a cloud-based solution that instantly integrated Salesforce data into the financial model was an immense relief.
Revenue growth rate
This metric gets a lot of attention—from investors, from executives, from the sales staff—and needs to balance both accuracy and ambition. To get there, I tell FP&A professionals that collaboration and conversation are key: How does the sales team feel about a particular market? What are the C-suite’s goals for the coming year? How is headcount on the sales staff expected to expand or contract, and what’s the ramp rate for those new hires? What are the company’s customer acquisition costs? To get to a revenue growth rate, you need to triangulate among historical data, drivers, and growth objectives.
Advice: If revenue growth rate is built on a series of assumptions, changing any one of those underlying figures can cause a radical shift. What would doubling the sales staff in a market mean? What if the executive team wants to stretch goals even further? How would a steeper ramp rate affect revenue growth? I do not miss the days of having to figure that out with spreadsheets. Now, with Adaptive Planning integrated with Salesforce data, I can change one number and watch how it impacts the entire revenue growth calculation.
For better revenue forecasting, recognizing revenue accurately is an absolute must. The FP&A team needs to create and apply revenue recognition rules to one-time and recurring bookings streams. That’s what allows you to translate different types of bookings (subscription vs. service, Annual Recurring Revenue vs. multiyear) into revenue. Having the right rev-rec rules (as we call them) in place can help the executive team to make better and more informed strategic decisions regarding the future prospects of the company. It lets the entire company be more proactive around the revenue plan, rather than simply sitting back and hoping tactical decisions have the intended effect.
Advice: If you’re stuck using spreadsheets or a cumbersome legacy system, there’s a built-in lag between the data and the insights you can provide. Real-time dashboards can give you the insights you need to stay on top of your revenue streams and see the outcome of tactical decisions on revenue, as they’re unfolding. That means the team can react and adjust faster—and keep the company moving closer to the targets you’re trying to hit
The bottom line: Being on a SaaS finance team requires speed and agility. Modern finance technology can help to keep pace in this dynamic marketplace.