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5 steps for setting your SaaS business budget


If you have launched a SaaS business and have not put a formal budget in place, you are not alone. It's never too late to initiate a 12 month rolling budget, so don't wait til next year. When you set a budget you lay out clear plans and goals for your business, and you go through critical analysis that will give you a better return on every dollar invested.

I'm a fan of keeping it very simple, but meaningful. A simple excel worksheet (or similar) is still the best tool for small to mid-sized businesses to use. A monthly view (not quarterly) is preferred so that you can measure your performance objectively right from the first month. I also like to separate language like 'target' from 'forecast'. I define target as what you want your salespeople to achieve, and forecast is what you measure your performance against.

1. Start with your revenue forecast. Nobody knows exactly how much you are going to sell over the next year, but that is no excuse for lack of planning. Break it down into reasonable estimates per category, per customer segment, per channel, and/or whatever other means can help you come to a hypothesis of what is realistically achievable by month over the next year.

2. Back up from there to set sales targets. In order to achieve the revenue forecast in step 1 you'll want to ensure your sales team has targets at least 10% higher. Divide your revenue forecast in step 1 by .90 in order to set targets that allow for 10% deviation in order to stay on forecast. Note these sales targets because you'll need them when forecasting your sales commissions.

3. And back up once more to consider what your leading indicator targets need to be hit your revenue targets. You'll need to incoporate a reasonable close ratio and then work the math backwards. The goal of this step is to get real about what your pipeline needs to be in order for you to ultimately hit the revenue forecast. Here's an example: Givopoly (an online gift marketpace) needs to attract 26,000 website visitors in order to generate $100,000 in revenues based on a close ratio of 7% per visitor and average revenues of $55/transaction. So Givopoly needs to build a marketing plan around attracting 26,000 website visitors per month should we be planning for $100,000 in Revenues. What's your close ratio? How big does your funnel and/or pipeline need to be in order to hit your target? Give it some thought because many entrepreneurs forget to factor in the concept that many leads do not close and therefore grossly overestimate their revenue forecasts.

4. Now it's time to plan your spending. Break it into a maximimum of 5-6 major spend categories and ensure resource costs are also allocated to one of these instad of being contained in a generic 'salaries and benefits' cost line. Also make sure there is a single person accountable for a category. Shared accountabilities on a given category just don't work well from my experience. Effective budget accountability requires the spirit of 'only one throat to choke'. <insert evil grin>

Here are the spend categories I recommend for most SaaS companies:

- Cost of Sales - All variable costs (directly attributable to revenue). For SaaS companies, this is generally merchant processor fees, channel partner fees, referral fees, and aother variable costs of the transactions running through your systems.

- Customer Success - This is fairly new spend category for most accountants (inspired from the SaaS business model) that covers customer service and support to ensure satisfaction throughout the customer transaction.

- S&M (cost of selling) . Although I know some companies like to split out sales and marketing separately, from a KPI standpoint I prefer to combine them into a single spend category (cost of selling) as together they speak to what it costs to "generate a sale" from lead generation to close. Every SaaS business should have an awareness of what their cost is to acquire a customer (CAC) by calculating their cost of sales and marketing and dividing it by the number of customers acquired during the same period. Don't forget to include commission costs.

- R&D - All costs associated with research and development are contained in this category and spend gets prioritized by the product roadmap. Ownership and accountability of this budget is key because spend prioritization needs to consider feedback from Customer Success, Sales and Marketing, risk mitigation considerations as well as ensuring a reliable product that customers appreciate.

- and G&A - basically the catch-all for corporate and support costs including HR, Accounting, legal fees, insurance, office expenses, bank fees, etc. What is the threshold standard necessary for your business? Beyond that you'll want to focus on being lean and efficient because this is the least sexy area for your business for anyone other than your admin staff. However this area does include spend support for Corporate Culture, and we should not underestimate the benefits of a strong corporate culture! It's wise to give a little latitude to HR administrators at budget time because happy employees are productive employees.

5. Factor in grants or government incentives into a separate category called 'other expenses'. Yes, it will be a negative epense, but trust me, for reasons only accountants care about, it does belong as a negative expense and not an income category. I also prefer it be separated into it's own category rather than an expense savings attributed to other categories. For instance, I prefer keeping SR&ED ITCs separate from R&D spending so that companies keep it real when it comes to tracking their monthly burn rates.

So there you have it. Sounds pretty simple, but these 5 steps can take weeks depending on the size of your team and the number of revisions necessary to get things to balance. Any questions? Think I'm missing anything? Share your comments... let's have a discussion.

Susan Richards, FCPA, FCMA provides CFO services to ambitious SaaS businesses in Ottawa, Ontario. susan@numbercrunch.ca

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