This article comes from Idriz Adedoja’s talk, ‘Metrics for financial success: Starting strong with a solid P&L structure’, at our 2023 SaaS Metrics Summit, check out his full presentation here. 

Charting your course for the SaaS big leagues? How well are your finances built to get you there?

Over my decade-plus career in the SaaS industry, spanning companies and markets across the US, UK, EU, Africa, and the Middle East, I’ve seen the good, the bad, and the ugly in SaaS metrics and finance. 

With the industry ballooning to over $260 billion globally and on its way to well over $300 billion by 2030, there’s certainly no shortage of growth and opportunity. 

However, I’ve learned firsthand that pursuing growth sustainably requires laying the foundations of financial rigor and operational efficiency early on. 

Often scaling companies miss the mark on metrics that matter, and the fundamentals get overlooked, only to surface as issues later. 

In my current role as Portfolio Finance Director at two leading SaaS firms, I’ve made it my mission to rectify these issues. 

Whether you’re a founder aiming for product-market fit or an established operator seeking to optimize, my insights on key SaaS metrics and P&L best practices will help arm you for resilient growth.

I know I’ve certainly learned through hard-won experience— so let me shorten your own journey!

Must-track SaaS metrics

When assessing SaaS health and performance, I cluster metrics into three high-level groups:

  1. Growth metrics like customer acquisition costs (CAC), payback period, and logo & revenue retention rates. 
  2. Sales efficiency metrics centered around customer lifetime value (LTV) and CAC. 
  3. Business efficiency metrics that track capital efficiency, like burn multiples.

Getting these universal metrics right is absolutely crucial for any SaaS company, whether early-stage or at scale. Let’s walk through why each matters.

1. Growth: CAC, payback period & retention for health 

CAC shows what you’re spending to land each customer and is a useful metric for benchmarking your sales engine against averages for your niche. The payback period reveals how long it takes you to earn back your CAC—the quicker the better!  

But equally as important - logo and gross revenue retention rates. It doesn’t mean much if you’re adding customers or short-term sales while seeing high churn or contraction. 

Customer success teams play a key role here in earning you renewals and expansions. Maintaining retention above 80-90% should be any SaaS’s key recurring revenue goal.

2. Sales efficiency: Aligning LTV & CAC for profitability 

While growth KPIs show customer acquisition ability, sales efficiency metrics like LTV: CAC show your profit engine’s effectiveness. 

Basically, the lifetime value of a customer must sufficiently exceed the cost to acquire them to finance activities and realize profit. 

I like to see ratios of 3:1+ because that indicates healthy unit economics. If CAC far outweighs LTV, you’ll need to dig into sales performance and product market fit.

3. Business efficiency: Burn multiples for capital management  

Especially for startups and growth-stage SaaS companies, burn multiples help you watch how fast you’re going through capital. 

You can calculate this by dividing the cash burn rate by net new ARR generation each month.  

Ideally, this metric should trend under 1.5x. Anything above 2x indicates that care should be taken to prune unnecessary costs or unproductive growth investments to avoid prematurely running out of runway.

Trust me - sound financial management requires keeping an eye on all three metric families!

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Flaws of the “ordinary P&L”

Just as having the right metrics in place is non-negotiable, so too is structuring your finances and profit & loss statements (P&Ls) for maximum transparency and actionability.

Yet time and again in providing portfolio finance direction, I encounter what I call the “ordinary P&L”, and it’s plagued by:

  • All lump-sum top-line product income rather than segmentation 
  • An all-encompassing cost of goods sold (COGS) line item  
  • Operating expenses are loosely grouped into big buckets like “G&A” and “R&D”

Don’t get me wrong— it has its time and place for high-level profitability analysis. However, ordinary P&Ls give little visibility into what’s driving performance underneath.

You end up flying blind on questions like:

Which products are most or least profitable?
What activities or inputs are inflating COGS?  
Are bloated operating expenses centered in any one function?

This greatly limits finance’s ability to pinpoint problems or opportunities, leaving department leads guessing rather than empowered with insights on their budget impact.

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Constructing a structured P&L for enhanced visibility 

The best P&Ls I’ve overseen with SaaS companies reflect the underlying structure and operations of the business. This translates to:

💼 Top-line segmented by product lines and revenue types 

🏗️ COGS broken down by major cost drivers like infrastructure, support, partners

🧮 OPEX split by function—sales, marketing, product/R&D, etc. Further segmented by teams/activities within those groups

Yes, this level of detail demands upfront work by finance to analyze needs and coordinate with department leaders. However, the long-term gains in visibility and actionability are truly immense!

With a structured P&L, questions like which products drive overall or new customer revenue get answered at a glance.

Drilling into these questions moves finance conversations from reporting into true strategic advising, shifting you from scorekeeper to playmaker!

Final thoughts

There you have it! I hope sharing my firsthand lessons has helped you distill actionable clarity on the finance foundations of driving a sustainable SaaS, regardless of size or stage. 

Whether you're an early-stage operator still searching for that perfect product-market fit, a scale-up navigating hockey stick growth, or an established firm looking to optimize...taking the time to nail down metrics, construct insightful P&Ls, and translate data into cross-functional leverage is time well invested. 

Do this before rigid structures set in, and you can establish roots for efficient expansion. Think of it as a compass to guide confident steering through whatever storms or surprises the journey ahead holds.

Of course, no formula can account for all the exhilarating uncertainty that makes SaaS such a dynamic industry. Expect new lessons to keep emerging! 

But for now, start strengthening those metrics and financial pillars underpinning success. Here’s to taking the first steps toward that outcome today!