Structuring your SaaS P&L

As your startup matures, there are several SaaS-specific business metrics that you will want to track to improve your decision-making, ascertain the health of your business, and benchmark yourself against other SaaS startups. Structuring your finances (specifically your profit and loss statement) in a SaaS-friendly way can make it very easy to track these metrics.

Sanitise your recurring revenue

Several of the most critical SaaS metrics (and your valuation) heavily depend on your recurring revenue (i.e., ARR or MRR). So, having a sanitised and accurate view of your recurring revenue is critical. On your P&L, make sure your revenue is split into multiple lines so that it is easy to differentiate between the different types of revenue you collect, and your recurring revenue does not include any other revenue types like professional services. This is equally as important for transactional SaaS businesses.

Align cost centres to key SaaS metrics

In most businesses, expenses are allocated to functional cost centres, meaning each department will have its own expense line.

While this makes sense for most businesses, it can be tough to calculate specific SaaS metrics. The fact that many departments have responsibilities that impact multiple SaaS metrics causes this difficulty. For this reason, I recommend adopting the following expense categories (more granular is fine, though, as long as they can sum up to these categories):

• Recurring Revenue COGS or the cost of your recurring revenue. This tells you how much it costs you to provide your software to your customers. This is the total of your cost to support your customers (customer support team salaries, tools, and other expenses) and the cost of any infrastructure, hosting and third-party licenses for your software.
• Customer/Revenue Acquisition Costs or the cost of acquiring new customers/revenue. This tells you how much you’re spending on growing the business, allows you to calculate key metrics like CAC and CAC Payback, and typically includes sales and marketing salaries and expenses (e.g., events, tooling).
• Product Development Costs or the cost of expanding your product through software development. This tells you how much it costs to improve your product and includes most of your product/engineering team salaries and the other expenses associated with your product development efforts (such as tools).
• Professional Services Costs or the cost of providing billable professional services to your customers. If you offer billable professional services to your customers, you should have a revenue and an expense category for professional services. These expenses typically include the salaries of your professional services team and any tools they use.

The reason these buckets are more valuable than department-specific expense lines are:

• Your product and engineering departmental costs don’t exclusively fit into Product Development Costs because hosting, infrastructure, and maintenance costs belong in the Recurring Revenue COGS bucket.
• Functions like customer success, who work to both grow and retain revenue, typically fit in both the Customer/Revenue Acquisition Costs and Recurring Revenue COGS buckets.
• Customer/Revenue Acquisition Costs needs to include anything related to acquiring new revenue/customers which for many companies can include cross-company expenses that might not fall into the budgets for your sales and marketing teams by default.

Finally, let’s talk about the SaaS financial metrics you should track. These won’t live in your P&L, but you will calculate them using the above revenue and expense categories. Many more metrics matter and I’ve previously outlined an enormous list in my 101 on the SaaS business model. But, the foundational financial metrics that you need are:

• Recurring Revenue Gross Margin → The profitability of your recurring revenue. This is your Recurring Revenue COGS divided by your Recurring Revenue (e.g., MRR COGS ÷ MRR or ARR COGS ÷ ARR).
• Cost to Acquire a Customer or CAC → The cost for acquiring each new customer. This is your Customer/Revenue Acquisition Costs for a given period divided by the number of new customers gained during that same period.
• Cost of New ARR → For every dollar you spend on acquisition, how much MRR do you earn? This tells you how efficient your sales and marketing efforts are. You calculate this by dividing your Sales & Marketing Costs by your New MRR (Sales & Marketing Costs ÷ New MRR).
• CAC Payback Period → You use this to benchmark the long-term sustainability of the business and its sales model. It estimates the number of months it takes for the SaaS provider to recoup the cost of acquiring the average customer and is calculated by comparing your CAC (Cost to Acquire a Customer) to your ARPA (Average Revenue per Account), while factoring in your Recurring Revenue Gross Margin (CAC ÷ (ARR ARPA × ARR Gross Margin) × 12).
• R&D:Recurring Revenue Ratio → This metric tells you how much you spend on R&D in comparison to your recurring and is a useful for benchmarking R&D spend against other SaaS businesses. You calculate it by dividing your R&D Spend by your recurring revenue (e.g., Monthly R&D Spend ÷ MRR or Annual R&D Spend ÷ ARR).

Learn more about the metrics that might matter to your startup.