Financial modeling can seem intimidating for any startup founder. You’ve got your product, a small team, and maybe even some customer traction. But then investors start asking about your financial model, and the pressure is on. You know this isn’t just about numbers — it’s about telling the story of your business in a way that convinces investors that you can grow and scale.
Financial models are like a roadmap for your startup. For SaaS companies, where recurring revenue and growth potential are everything, they’re essential. You use them to forecast revenue, predict costs, and track cash flow. But most importantly, you use them to show investors how you plan to grow into a successful business.
When you walk into a meeting with VCs or potential investors, they’re going to want more than just passion. They want to see that you have a plan and understand the financial underpinnings of your business. In short, a solid financial model is what moves you from "startup with potential" to "startup with a future."
In simple terms, a financial model is a spreadsheet (usually in Excel or Google Sheets) that predicts your company’s financial performance over a specific time frame, typically three to five years. The most basic model will contain an income statement, a balance sheet, and a cash flow statement.
For SaaS companies, there are a few key aspects to focus on:
Whether you're a seasoned founder or starting from scratch, here are a few tips for building a financial model:
Start with Excel: While there are plenty of modeling tools out there, Excel is still the most widely accepted. Plus, it’s flexible and powerful enough for most startup needs.
Focus on cash flow: Investors are always worried about when a startup might run out of cash. A detailed cash flow projection helps answer that critical question.
Look ahead 3–5 years: While predicting the future is nearly impossible, this time frame helps investors visualize your growth potential.
Build from the ground up: Don’t try to take a percentage of a huge market. Instead, show how your customer acquisition efforts and pricing model will generate revenue.
Document everything: When assumptions drive your model (for example, conversion rates, customer acquisition costs, or salaries), document those assumptions clearly. This makes it easier to update your model over time.
SaaS companies, unlike other business models, rely on predictable, recurring revenue. Here’s how you can structure your revenue models:
Customer Acquisition Models: How are you acquiring new users? Your customer acquisition cost (CAC) is a crucial metric for SaaS startups. Whether through inbound marketing, direct sales, or partnerships, understanding and predicting the cost to bring in new customers is essential.
Recurring Revenue: A subscription-based SaaS model revolves around monthly or annual subscriptions. Projecting your Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) gives you a clear picture of your financial future.
Churn: Not every customer sticks around forever. Some will leave, and this is known as churn. Keeping track of churn rates allows you to predict how many customers you'll retain each month. For example, if you have a 2% churn rate, 98% of your customers will continue to pay you monthly. If your churn rate is too high, that’s a red flag for investors.
As a SaaS startup, your costs often revolve around customer acquisition, product development, and server infrastructure. Here are the key areas to watch:
Customer acquisition costs (CAC): How much are you spending to acquire each customer? A CAC that’s higher than your customer lifetime value (LTV) means trouble. It’s important to get this ratio right and model different CAC scenarios.
Server and hosting costs: For SaaS companies, hosting fees can scale quickly. As you grow, predicting when these costs will skyrocket is essential. Services like AWS or Google Cloud provide tools for cost forecasting. Make sure to allocate these as a part of your Cost of Goods Sold (COGS).
Customer support and success: This is often one of the more overlooked expenses. For SaaS companies, having a customer success team ensures lower churn and happier customers, but it comes with costs. Forecast how many customers each support rep can handle, and scale your support staff accordingly.
Let’s say you’re running a small SaaS company offering project management software. Your key costs would include:
Marketing and Sales: Perhaps you’re using Google Ads, spending $1,000 monthly, which brings in 100 visitors. If 10 of those convert to paid users, your CAC is $100.
Hosting Costs: If you’re using AWS, you may start with $200/month for 100 customers, but as you scale, hosting costs may jump to $2,000 for 1,000 customers.
Customer Success: Each customer success representative might handle 100 customers, so if you project having 500 paying users by the end of the year, you’ll need at least five reps on payroll.
Overly optimistic revenue projections: We all want to believe our business will grow exponentially, but being too optimistic can hurt your credibility. Investors would rather see a realistic (even pessimistic) forecast that you can outperform.
Ignoring expenses: It’s easy to get caught up in revenue, but expenses are often what sink a startup. Be sure to account for all costs, including software licenses, customer support, and even payroll taxes.
Top-down modeling: Don’t just assume you’ll capture a small percentage of a large market. Instead, show exactly how you plan to grow from the bottom up.
Your financial model is more than a spreadsheet — it’s part of your story. Here’s how to incorporate it into your pitch:
Showcase your understanding: Investors want to see that you understand the levers that drive growth. Walk them through your key assumptions.
Highlight your runway: Be clear about when you’ll need additional funding, based on your current burn rate and cash position.
Stress-test different scenarios: What happens if your customer acquisition cost doubles? Or if churn spikes? A good financial model should be flexible enough to account for these what-if scenarios.
Financial modeling is a critical skill for any SaaS founder. It helps you run your business, attract investors, and ultimately grow into a successful, scalable company. By focusing on cash flow, documenting your assumptions, and staying realistic with your projections, you can build a model that will guide your startup through the early stages of growth.
For more in-depth guidance on SaaS financial models, visit the ShoutEx blog. And if you’re just getting started, consider tools like Google Analytics or HubSpot CRM to track your growth and customer acquisition.