“What are the most important SaaS Metrics for my business?”
A quick search of this phrase will bring up a variety of different answers, each varying slightly, none necessarily conclusive and specific to your own business. Chances are you’ve probably spent some time in a search surrounding this exact phrase. Jumping from site to site, you’re likely to find a variety of answers, each pointing to different answers, different opinions, and different priorities. Which one is correct? How can all these SaaS finance experts have divergent views?
As we like to say, there is no one Golden Metric. You have to find the right combination of metrics to best and most accurately tell the story of your business. Insufficient or inaccurate metrics can give your faulty projections and unreliable timelines, of course. However, even squeaky-clean metrics that don’t relate well to your business can cause confusion and add little value to your finance strategy.
That being said, as a finance team working specifically in the SaaS industry every day, we’d like to offer what we believe to be some of the most important metrics for your SaaS business to track. We’ve broken these down into four categories:
Customer Metrics—Customer Count, Customer Churn
Recurring Revenue Metrics—MRR/ARR, Gross Revenue Churn, Net Revenue Churn
Cashflow Metrics—Cash Burn, Days Sales Outstanding
Customer Economic Unit Metrics—LTV, CAC, LTV:CAC, Magic Number
The benefit to categorizing these metrics is to provide context as to what piece of your company’s story can be told by each individual metric.
Customer Metrics
Customer metrics help you understand the habits and trends of your customer base.
Your customer count, of course, will tell you how many of each type of customer you serve. Knowing how many of each segment (for example, enterprise and SMB customers) will give you insight into the types of resources needed to best serve each type of customer. These counts can include opening customers (# at the start of the year,) churned customers, new customers, and net new customers (your new less churned customers). All of these counts will be instrumental in evaluating your performance of sales, marketing, and customer success teams.
Customer churn is another important customer metric that shows you the number of clients leaving your business. This metric illustrates how well you are able to retain your customer base, and allows you to make adjustments and improvements based on performance.
Note: While nobody ever likes to see customers churn, this is an example of how important context is in your metrics. Losing 10 customers in one year can mean very different things depending on what type of customer they are—it doesn’t tell you much at face value. Perhaps those 10 logos were of low contract value, or companies that took up most of your support team’s time. In either case, it might not be the worst thing that they churned! Of course, if you’re losing ten high-value customers, it may be time to kick your retention strategy into higher gear.
Knowing your average revenue per account (see below) will not only aid you in analyzing the impact of your churned customers, but also tell if your remaining accounts are growing over time. It’s great to have retained your customer base—however, it’s important to take measures to increase the amount of revenue each customer on average contributes to your business through upsells, seat increases, etc. Remember: not every customer is the same—make sure you track how performance varies with each plan or product type for your business.
Recurring Revenue Metrics
One of the greatest benefits to the SaaS business model is Recurring Revenue. Instead of traditional one-time purchases, recurring revenue gives you predictable, repeatable revenue that allows you to help you identify your company’s value long-term. This is measured in MRR (Monthly Recurring Revenue) or ARR (Annual Recurring Revenue). MRR/ARR detail how much revenue you are expected to receive in a given time period and allows you to make future business decisions based on this expected revenue. You can also use this metric to evaluate the health of your business—either looking at the growth rate or as a factor in other metrics (many of them are calculated using MRR/ARR).
Understanding the revenue you have and will generate will also put certain numbers into perspective. It’s important to know which specific metrics best tell the story of your business. For example, if you take a look at your Gross Revenue Churn, you’re only seeing the amount of revenue you’ve lost in a time period. That likely won’t feel too great, and won’t paint an accurate picture of your overall performance. However, if you also consider Net Revenue Churn, you’re able to see how expansion and upsell revenue offset the revenue that has churned.
Your existing customer base may be putting your net revenue churn closer to zero, or even negative churn. If that’s the case, you may not need to focus too much on revenue that has left your business when your existing business may be earning those dollars back. Once again, using the metrics that tell the appropriate story of your business are what are really going to help you in the long run. You can also take a more detailed look into the different types of churn here.
Knowing your different churn metrics lets you focus on improving your recurring revenue not only by shrinking churn, but also by increasing the number of opportunities to expand and upsell your existing, loyal customer base.
Cashflow Metrics
Cash is king. Knowing where it’s going and why can help you optimize flows and assess efficiency. Cash burn keeps track of how much money your company spends in a given time period. Not only does it show you the rate at which your company is using revenue, but it also lets you know how much time you have before you run out of cash—something every company wants to be clued into. You can use cash burn to analyze the efficiency of your spending.
Your Days Sales Outstanding is another cashflow metric that is crucial to both you and your (if applicable) investors. It measures how long it takes your customers to pay you for your service, or, in other words, how long it takes to convert your sale into cash. If your customers are late on their payments, you might be in trouble when attempting to pay your own expenses with cash you haven’t yet received! Lowering your DSO will optimize your cash flow.
Customer Unit Economics Metrics
Customer Unit Economics Metrics help you understand the value, behavior, and cost of each average individual customer (or “unit”). They act to answer very important questions about your business, such as:
How much revenue does one of my customers generate in their lifetime? (LTV)
How much does it cost my business to acquire each customer? (CAC)
How profitable are my customers to my business? Am I spending too much in relation to how much revenue they generate? (LTV:CAC) You can view a video about that here.
These metrics are crucial to understanding the value of each average customer. By understanding the above metrics, you can optimize your customer’s value to your business by either lowering your acquisition costs or taking measures to increase the amount of revenue they generate for you.
Another important metric to consider is the SaaS Magic Number. This is a unique metric that measures the efficiency of your Sales and Marketing efforts. It measures how much revenue growth is earned for each dollar spent in Sales and Marketing. From there, you can analyze if you’re spending too much, or whether you could afford to spend more to get an ever greater return. Combined with other Customer Unit Economics metrics, the Magic Number paints a picture of the efforts, benefits, and lifespan of each customer going in and out of your business.
Overall, any online search can give you a list of metrics that are crucial to your SaaS business. However, to understand which are important for you to know, you need to understand the context and importance of each metric. Before incorporating any into your strategy, make sure you think about which ones will best tell the story and answer the relevant questions for your company. Only then can you begin to better understand and optimize your business.
This is Guest Post by Mandy Leavell of KIP Sense.
KPI Sense is the CFO platform for SaaS businesses. Tech-enabled automation paired with SaaS expertise at one low monthly cost. Learn more at kpisense.com.
If you’re like many CFOs, your role includes overseeing many
human resources functions beyond management of your finance and accounting
team. Human capital, talent, workforce, personnel, human resources, or just HR
– no matter which term your organizations uses it comes down to the same
issues: recruiting, training, and managing everyone who works for your
organization and the associated short- and long-term costs.
However, there’s more to HR than managing costs. CFOs are
strategists, and in today’s competitive labor market, your company’s growth is
tied to retaining and recruiting top talent. That means putting together a
competitive compensation and benefits package while creating long-term
strategies to develop essential leadership positions.
In this post, we’ll explore why CFOs may take on HR duties as well as four reasons why it makes sense for a modern CFO to oversee HR – and a couple of situations in which CFOs may need to take a step back from HR.
CFOs and HR: Four Reasons it Makes Sense
The typical CFO job description may not include the
management of human resources. However, that’s precisely what many CFOs are
doing.
As a CFO during the Recession, cost-cutting was paramount to
your company’s survival. Eliminating an executive position often meant yours
remained while HR was cut. Your traditional role was altered as you took on HR
responsibilities; there was just no one else left to do the work.
You were in good company: about one-fifth of CFOs surveyed
in 2011 had taken on more HR duties during the previous three years, according
to a survey by Robert Half Management Resources.
Working for an early-stage company is another route CFOs
take to HR. Newer companies often lack the financial resources to add an HR
executive and with few employees to manage, there really isn’t a need.
Regardless of how you got here, as CFO you are now managing
HR. While lower-level HR staff handle job postings, onboarding, payroll, and
forms needed to maintain compliance, you handle more strategic HR duties:
• Putting together
a competitive but cost-effective benefits package
• Developing
employee performance evaluations process
• Strategizing and
building an executive team
• Keeping the
organization in compliance with employment law requirements
A CFOs skillset is a good fit for these and other aspects of
HR. We’ll discuss a few.
1. Employee compensation and benefits costs are going up.
With labor and benefits costs comprising an ever-growing
slice of your budget, as the person charged with financial forecasting and
budgets, a CFO’s management of HR can make a lot of sense.
As CFO, your job is to manage the finances and watch the
bottom line. Rising healthcare costs, as well as increased wages in a
competitive job market, will continue to impact that bottom line. As CFO you’re
likely spending more time analyzing expenditures and devising ways to cut those
costs.
That’s not an easy task: health benefits costs increased by
3.6% in 2018, according to Mercer’s “National Survey of Employer-Sponsored
Health Plans.” Smaller employers – those with 10 to 499 employees – took an
even harder hit with an average increase of 5.4%. The 2019 increase is expected
to rise by 4% this year, continuing to outpace both workers’ earnings growth
and inflation.
Moreover, reducing costs isn’t going to get any easier: data
from HealthAffairs indicates the cost of healthcare goods and services will
continue to rise through 2027 and at a faster growth than we’ve experienced
over the last ten years.
It’s no wonder that the Mercer report also noted midsized
and large employers ranked “managing high-cost claimants and “creating a
culture of health” as top strategies for the next five years. Considering the
per-employee average healthcare cost is nearing $13,000, keeping that number
from increasing is critical.
Other benefits that need financial management include those
not traditionally under a CFO’s administration, such as employee training
expenses, and those that are, such as retirement plans and employment claims
legal expenses.
2. Financial know-how is necessary during negotiation with benefits vendors.
A CFO’s understanding of financial lingo mean involvement during
negotiations with benefits vendors is critical to getting the most bang for
your buck. CFOs may also better understand modeling tools offered by benefits
vendors because financial modeling is a strength for financial executives.
Using a combined finance and HR team approach to negotiating
benefits packages and costs will result in the best options for the budget and
employee needs.
3. CFOs are data-driven and compliance- and process-oriented.
A CFO’s strengths include being process-oriented and making
decisions based on collected data. Those qualities are needed in HR but are
often overlooked by busy HR professionals preoccupied with day-to-day tasks.
A survey by Launchways vendor partner Paycor noted 43% of
small and medium-sized organization (SMBs) don’t track costs associated with
recruiting, hiring, and onboarding new employees.
Creating a consistent process for reviewing, rewarding, or
removing employees is essential no matter your company size. Then, your data
analysis skills can make sense of data collected to find opportunities for
efficiencies.
Even when processes are effective, without the data to back
up their claims, HR may have a difficult time convincing their executives that
employee engagement dollars are money well spent. That’s particularly true if
HR hasn’t made developing C-suite relationships a priority.
Process-driven and already in the C-suite, a CFO is often an
organization’s best option for this combined role of tracking and analyzing HR
spending and communicating the value to executives.
4. CFOs develop long-term strategic plans which include talent and leadership.
When you took on HR duties during the Recession, it’s likely
you focused on obtaining the best results with the fewest number of employees.
You made strategic talent decisions based not just on the cost of talent and
benefits, but also on getting the most productivity for your money.
Talent issues have changed dramatically since then. Now,
retaining employees is crucial to the bottom line as companies compete for a
shrinking pool of available, qualified candidates. In fact, a 2019 Deloitte
survey of CFOs found that 80% rated leadership as a high priority for their
organizations.
However, you know it’s not all about the money: low
unemployment and an aging population mean fewer qualified workers available to
help your company grow. Compensation, benefits and perks, opportunities, and
culture are all part of the mix.
As a CFO, you likely either manage or work with the CEO to
manage the creation of essential strategic responsibilities such as developing
a leadership team and defining employee roles and objectives as well as
managing the entire team’s performance.
Cases Where a CFO May Need to Step Away from HR
As your company grows and becomes more complex, there are
good reasons to hand over some of the HR duties you’ve assumed.
1. HR is taking up too much CFO time.
If non-urgent and non-strategic issues such as employee
discipline or hiring are taking up too much of your time, it might be time to
hand over some of your HR duties to a strategic HR partner.
Even if you offload some HR responsibilities, you can continue
to maintain oversight of benefits and insurance and lead your organization’s
long-term strategic talent retention and recruitment efforts. With the insight
you gained tackling less strategic HR duties, you can continue to advocate for more
tools to capture and analyze HR data as well as training, benefits, and perks
that result in improved employee satisfaction, engagement, and productivity.
2. It’s time to hire someone with different people skills.
Another reason for stepping away from HR can be admitting
that you may not have the necessary people and communication skills needed to
handle employee issues one-on-one. It’s not that you’re a lousy communicator,
it’s just that employees may assume as CFO you’re only interested in finances,
not people.
Alternatively, as finance chief, you may be excellent at
presenting high-level financial information to executives and your board but
struggle to explain personnel issues in terms other than dollars and cents. If
your organization can hire an HR professional whose people-focused skillset
complements your more analytical side, it could be a sound business decision.
Key Takeaways
Increasing compensation and benefits costs continue to
affect the bottom line. However, with a shrinking pool of qualified candidates,
retaining and recruiting employees is a top priority. A CFOs financial
expertise and ability to model different scenarios are critical to creating effective
HR processes at any business.
Because CFOs often work with the CEO to strategize for
growth, in today’s talent shortage, understanding and planning for talent
retention and recruitment is a top priority. An informed and involved CFO can
also advocate for employees when there is no HR executive to do so.
As companies grow in size and complexity, CFOs who are too involved in HR should advocate the hiring of an HR executive or outsourcing more HR duties. That goes double if a CFO’s communication skills are better adapted to the board room than conversations with employees.
Historically, the roles of CFO and CHRO have been considered
entirely separate, perhaps even with competing priorities. However, companies
are increasingly seeing these roles as being deeply connected and working
towards a common goal. As a result, finance and HR teams are starting to work
together more and more. According to an Ernst & Young survey, 80% of HR and
financial professionals interviewed said that their roles had become
increasingly collaborative over the previous three years. And effective
collaboration starts at the top, so CFOs should learn how to effectively
collaborate with their HR counterparts.
When you think about it this makes complete sense. Financial
assets and people are the main drivers of business outcomes, so the executives
responsible for handling them should not only be communicating with each other
but actually working closely together to coordinate initiatives, track key
metrics, and measure performance. Both the finance and HR teams will benefit
from adopting practices and metrics used by the other, and from sharing data to
identify challenges and opportunities.
In this article we will explore how CFOs can effectively
collaborate with their HR counterparts, CHROs for our purposes, to achieve
business success. Let’s take a look at:
The benefits of collaboration
Why you need CHROs as a CFO
How you can help the CHRO
How you can break down barriers for true collaboration and a shared source of truth
The Benefits of Collaboration
Modern business challenges require modern and innovative
solutions. Getting the people responsible for the company’s finances and
workforce working together is one of the best ways to quickly identify business
challenges and create effective and non-traditional solutions
Working together directly connects human performance with
business success, adding objectivity to the analysis of human resource
initiatives and its impact on company financials.
Collaboration between CFOs and CHROs is especially important
right now, with a changing market and workforce. The business world is still
adapting to the lingering effects of the recession as well as the stimulating
and disruptive influence of startups and tech giants alike. At the same time,
Millennials are poised to make up 75% of the workforce by 2025, which means
that companies are having to adapt to engage and retain Millennial talent.
Linking the management of people and finances allows companies to be more agile
and responsive to these challenges.
Across the board many of the main challenges that businesses
have faced in recent years have been related to talent. Acquisition and
retention of all talent, but especially Gen Y and Gen X talent, has become a
major focus for not only HR professionals but companies as a whole. It seems
natural, therefore, for modern CFOs to build a strong relationship with their
HR counterparts in order to tackle this major financial hurdle.
A closer relationship between CFO and CHRO can boost
virtually every part of their respective responsibilities, as well as the
organization as a whole. That adds up to a real impact for a business’
bottom-line. So much so that companies with a high level of collaboration
between HR and Finance see an increase in top-line revenue, an increase of 10%
or more in operational cash flow, and an increase in employee performance and
engagement. That’s great news for CFOs and CHROs alike!
Why You Need Your CHRO
Contrary to what many CFOs believe, you really do rely upon
your CHRO. Every strategy and initiative that you craft with the CEO depends on
the company’s staff to succeed. The HR department is responsible for managing
that staff, making sure that they are working effectively as individuals and as
a team. The best way to do that is to get employees to understand the
importance of the company’s goals and their contributions to the achievement of
those goals. As a CFO, you need the CHRO to be the ambassador between you and
the people who make your strategies into realities.
That means not only appreciating and coordinating with the
CHRO or HR department but also making sure that they truly understand what you
are trying to do with the company. That way they will be able to help the
company’s employees understand, and help focus and coordinate each team’s
efforts.
The CHRO’s role doesn’t stop at evangelizing and managing
either. As a CFO, you know how important metrics are to measuring performance,
identifying issues, and creating solutions. Since CHROs are essentially your
go-between for the teams implementing your solutions, making sure they know
what metrics to collect and share can also make your life a whole lot easier.
At the same time, they can offer “softer” insights into potential causes of
successes or challenges.
The fact of the matter is that not everything can be
explained with numbers, or at least ones with dollar signs attached. Human
performance is extremely complicated and can often be hard to measure. Your
CHRO knows people and what factors might indicate or contribute to their
performance as individuals and productivity as a team. If you notice that an
initiative isn’t paying off like it was expected to, HR may be able to suggest
causes of the reduced performance.
By working directly with the CHRO and their team, you can
help them shape HR concepts into objective metrics that you can use to better
manage existing strategies and to plan more effective new ones. You may think
that you speak an entirely different language than the HR department, and that
may more or less be true in your current processes. But bridging that gap can
lead to invaluable insights.
Not convinced? Have you ever butted heads with the HR
department over proposed training or talent acquisition expenses because they
just couldn’t show you the numbers to justify the investment? Building a common
language, and helping the CHRO start tracking objective metrics, can ease these
tensions by equipping the HR team to adequately justify potential investments
in human capital. That makes your job easier, and makes it easier for the CHRO
to build the workforce that your company needs.
Why Your CHRO Needs You
Just as you need the CHRO to coordinate the implementation
of your strategies and offer human explanations behind your financial metrics,
the HR team needs your expertise to help them understand the consequences of
their activities, both positive and negative. Businesses are becoming more
numbers-driven in every single department. Marketing teams rely on key metrics
to gauge performance and plan strategies, particularly in the realms of SEO and
digital marketing. CHROs are feeling the pressure to meet the demands for
objective measures of the performance of their initiatives and of the company’s
workforce as a whole.
You probably live and breathe data and metrics, and likely
have for years. Your expertise can be invaluable to your CHRO as they try to
form strategies and develop reporting processes. We touched on how helping HR
teams track objective metrics can help your own planning and reporting, but the
benefits to the HR team itself are no less significant. That also means that
you shouldn’t stop at the metrics that you want to have access to, and that you
should help the CHRO create a performance management system that meets their
specific needs, with the proper metrics and KPIs. Again, your strategies
ultimately rely on the HR team for success, so make sure they have the tools
they need to do their jobs effectively.
What kind of metrics should you help the CHRO track? Here are
a few common examples:
Talent acquisition: Recruiting and hiring
Talent retention
Employee satisfaction & engagement
Sales volume
Absenteeism
What you can do to help your CHRO succeed isn’t limited to
helping them track their own data, either. Just as you can benefit from HR’s
insights into employee performance when figuring out the causes for a
strategy’s success or failure – or trends in the company’s financial health as
a whole – HR can learn a lot about the success of their own activities by
looking at their impact on your metrics.
Eliminating Barriers to Create a Common Source of Truth
That brings us to the ultimate goal in an effective CFO and
CHRO relationship. Both you and your HR counterpart are hurt when data, processes,
and personnel are siloed in specific departments. It makes it hard to find and
analyze the data you need to do your respective jobs, and harder still to see
the big picture and build strategies based on that picture.
Your team and the HR team are responsible for the two sides
of business success – its financial success and its people power. It only makes
sense for those two sides to work together towards the greater success of the
company, rather than serving as separate support departments. Creating shared
databases, processes, and even teams allows for greater collaboration as well
as higher performance by each department.
The goal is to create shared sources of truth for your
departments and for the company as whole. Not only does this enable you to see
all important metrics and communicate more effectively, it also helps you avoid
the duplication of effort. You won’t be tracking the same metrics multiple
times in separate databases or spreadsheets, unbeknownst to the other
department. You won’t have to wrangle key information from your counterpart or
be pestered for your data in return. Everything will run more smoothly, and
more effectively.
Key Takeaways
In this article we have explored many of the ways that CFOs
and CHROs can work together to make each other’s jobs easier and more
effective. Now, there’s a lot of ground to cover and we’re sure that your HR
counterpart will have plenty to say about the matter (and if, on the other
hand, you happen to be an HR professional reading this article, don’t be afraid
to share the article with your CFO). But hopefully we’ve given you a good idea
of where to get started building an effective collaboration with your human
resources team. Just remember to:
Make sure that HR understands your strategies and initiatives so that they can communicate them to the company’s staff
Get HR input on human explanations behind your data
Help HR track key metrics relevant to your initiatives as well as their own
Share your data with HR to help them understand the impact of their activities
Above all, create common databases and processes to foster easy, effective collaboration
This blog post is part of a series of articles on the role that CFOs play in their company’s HR success. If you work at a startup or other company that may not have a CHRO, then you may well be finding yourself handling more HR responsibilities than you expected. In our upcoming articles we will explore how you can handle your HR tasks effectively and leverage human resources to achieve business success. And since we can only cover so much in an article, we’re holding a webinar on the topic: Are you a CFO in charge of HR? What You Need to Know. So don’t forget to SAVE YOUR SEAT AT OUR UPCOMING WEBINAR.
