Startup Financing 101

December 19, 2019

If you’re a SaaS founder, you wear quite a few hats–product builder, visionary, sales leader, marketing guru. But arguably the most important hat you wear? Accountant. Your financials are what will get your product built, funded, and ultimately in the hands of your customers, so they can’t be left to massive spreadsheets built hurriedly before important pitch meetings. And even more than that, you can’t afford to not know the financial basics of your business. So, since we know you likely didn’t quadruple-major in computer science, business, marketing, and accounting, here’s a quick-reference startup financing guide for the SaaS founder.

For any business to properly project and report their financials, they’ll need three documents: an Income Statement, a Balance Sheet, and a Statement of Cash Flows. Most companies keep two of each of these documents–one to document Financial Projections and one to document Actuals

Actuals - Actual revenue and expense numbers that represent cash flow in your business
Financial Projections - A forecast of future revenues and expenses. In most SaaS cases, financial projections are crucial to getting funding from investors.

Let’s break down these three documents and what goes into each in a SaaS business model:

Income Statement

An Income Statement is made up of Revenue, Cost of Goods Sold, and Operating Expenses. The most important thing about your income statement is this: it represents revenues and expenses from a specific period of time. No comparisons to years or quarters past–income statements are a snapshot of your business over a specific period of time. This is why a projected income statement is typically what’s used in investor pitches: investors are interested in where you’re going and how you’re going to get there. 

Revenue - Income from sales of software and services
Cost of Goods Sold (COGS) - The amount of money it takes to produce your software (this includes labor, hosting, building, etc.)
Operating Expenses - The amount of money spent on activities not directly related to your software being buil

Balance Sheet

A Balance Sheet is a record of a company’s Assets, Liabilities, and Shareholder equity. As indicated by its name, the purpose of a balance sheet is to ensure that a company’s assets is balanced to its liabilities and shareholder equity. If the value of a company’s assets does not equal the value of its liabilities plus shareholder equity, then the company’s financials are not balanced, indicating that something hasn’t been fully accounted for and risking the integrity of your financials.

Assets - Any resource your company owns that has economic value
Liabilities - Any financial debts your company may have
Shareholder Equity - The amount of money that would be paid to your shareholders after all debts were paid

Statement of Cash Flows

A Statement of Cash Flows or Cash Flow Statement is a summary of the cash entering and leaving your company. Pretty straightforward! This document is, arguably, the least important of the three we’re talking about today, since the information represented in it can be found in (or at least calculated from) either the balance sheet or the income statement. 

Cash Inflow - All of the money coming in to your company 
Cash Outflow - All of the money being paid out of your company
Net Cash - The money left after taking your liabilities out of the equation

SaaS Financials Terminology

Here are a few SaaS-specific terms that might be helpful:

Recurring Revenue Model - The business model in which revenue is repeated consistently over time. Any SaaS business that uses a subscription pricing structure is using a recurring revenue model.
Magic Number - The SaaS-specific formula for measuring sales efficiency. This measures your Sales & Marketing spend against your ARR.

Key SaaS Financials Formulas

Keep these formulas in your back pocket for quick calculations:

Customer Acquisition Cost (CAC) 
Marketing Expenses Over a Period of Time
------------------------------------------------------
Number of Customers Acquired in the Same Period of Time
Gross Margin (percentage calculation)
(Total Revenue - Total Cost of Goods Sold)
--------------------------------------------
Total Revenue x 100
Annual Recurring Revenue (ARR)
(Overall Subscription Cost/Yr + Recurring Revenue from Add-ons or Upgrades) - Revenue Lost from Cancellations
Magic Number
(Current Q’s Revenue - Previous Q’s Revenue) x 4 
--------------------------------------------------
Previous Q’s Sales & Marketing Expense


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