Questions? Let me know in the comments happy to discuss. 🚀 Also, if you want to learn how to systematically scale your startup without ending up as one of the 90% of startups that fail, have a look at this ⇒ www.ericandrewsstartups.com/financeforstartups
Finally after 4 days I have completed this model I have spearing no efforts to learn Financial Start up Models Thanx a lot to upload such a valuable content lot of love from India
Eric thank you so much! It's so helpful and straightforward. You are actually producing value for people - that's already more than what 99% of startups do :)
Hey Vassanta - I really appreciate that feedback and I'm glad this lesson was valuable for you. I'm going to keep releasing lots more videos like this this year. Cheers 🙏
Fantastic Video as always Eric!! you are really great at explaining and building awesome models! If you're interested in a even quicker excel shortcut to add new row, it's: shift+ space to highlight, then ctrl & + sign, - sign to remove row:) thanks again!
43:06 shift+space to highlight row followed by ctrl+shift+"+" is a faster way of doing it. Don't need to click alt Also, for 44:05 you should probably use the pretax salary and not use after tax and just add the tax amount. I think the final value would be less than the total amount you're paying for them. e.g. assume 30% tax, you pay them 100k annual before tax. If you deduct 30%, you're left with 70k. But if you start with 70K and you add 30%, it would become 91k
Wow, youre a champion - thank you so much Eric! What about a transactional product that only takes about 1-3 weeks to close ? How would you format the sheet?
Nice Eric..but I want to give you one suggestion is to make appearance of your models more appealing plz make a video on this also..How make models more visually appealing
Maybe I'm missing something but it seems as though the model is only capturing the recurring revenue on 1 year of the renewal, and not on any subsequent year renewals. For example, for the first two contracts in M13, we recognize additional revenue related to them in M25. If those contracts renew and pay for an additional year in M37, I don't believe this model captures that revenue. Can you confirm? I'm building something out for myself and I noticed this.
Can someone plz confirm this, I may be wrong haha, but Insert a cumulative contracts row, so you take last years new contracts and add to last years recurring contracts, then apply Churn% to that number to get this years recurring contracts and onward. The churn% will be applied to both the returning new and the existing and not just new (you may have to check link in Active customer sec also). The model assumes customers will renew only once in the Churn Rev section, but also never gets rid of them in the Active total customers section, actually applies 0% churn to existing customers, which effects the customer support numbers. I am not sure if i am wrong, as i am new to this, but this would have a ripple effect through the model.
Absolutely correct. Just commented too. If you extend the model 2 more years and reduce ad-spend to 0 and make churn rate 0%, the ARR goes to 0 lol. Its only the people who are actually trying to apply this that got this mistake. The author basically got caught up with the 12-mo contract duration trick and forgot that renewals should roll over from year to year haha
Very useful, thanks Eric. 2 questions... 1. Any tips on how to include receiving 50% of the annual subscription upfront (instead of 100%) with the remainder on monthly instalments? 2. Implementation charges (50% of our customers typically pay a notable set up fee)?
1 - Yes you would effectively need to combine a lump sum payment (and associated deferred revenue) like we showed in the video but then add a regular monthly payment subscription model to it. You could do this by cohortizing the model, it's a bit more complex but nothing crazy. The only tricky part would be the deferred revenue. 2 - Yes at the conversion event you would effectively just include a lump sum implementation fee. So you could put in an assumption (say $20K) and add that in any time a customer converts.
Hi Eric! Thanks for the in-depth video. I had a couple questions: 1). Shouldn’t MRR be sum(total recurring revenue over past 12 months)/12 instead of sum(total bookings over past 12 months)/12? Unless I’m thinking of “recurring” too literally. 2). How did you figure out that our current customers are profitable and most of the cash burn is coming from onboarding new customer?
Sure. Here are my replies - (1) the formula in the video is correct, but its a shortcut. If you take each monthly of bookings over the last 12 months, knowing that each month is a pre-payment for 12 months of service (service = revenue), if you do that the long way with a big waterfall you will get the same mathematical result as my formula. For the mrr question, the MRR is just thus month's revenue, no averages. (2) with SaaS, all customers are fundamentally very profitable at the gross margin level. The issue is you have this giant investment at the beginning to market to them, but once you've acquired them (that is your customer acquisition cost), there is no more marketing cost because they are on a subscription. So you basically lose a bunch of money on marketing and make it back + more over their long relationship with your company.
Aren't you only applying churn to the contracts that are newly signed? Don't the recurring contracts need churn applied to them incrementally after the year is over after for those that renew?
Thank you Eric for this amazing video! One question though... Are we not supposed to recognize the deferred revenue as actual revenue in the following months sort of in a cohort way dragging it month by month? You left it as deferred rev all the way but we have already delivered our service by the end of the year.
Another point on enterprise sales, it's sales driven rather than advertising, so in customer acquisition comes mostly (if not only) from sales development. Is it possible to add that in a new video & sheet about enterprise software? The current model focuses on leads coming from ad spend, but in enterprise software leads come from outbound sales, and are probably a function of how many sales development reps you have (Leads / SDR) , not of a $ budget on ad spend. What do you think?
thank you so much. I can't believe how useful this is. I am an MBA student and this will be so incredibly helpful as I build a financial model for a real startup. Question for you - how do you recommend capturing teh implementation costs for a saas business? the startup I am looking at has a fairly substantial upfront implementation / setup cost for each new customer. Any recommendations on how to incorporate this into your model?
Glad to hear it. For sure for implementation revenue you would just create another revenue line and could create a formula that puts in $X implementation revenue after you convert a new customer.
Hi Eric, could you please explain in brief how to model if the saas company bills the customer by volume and is not a subscription contract, e.g AI voice bot company that charges the customer on the number of texts or call duration? Also, from the sales funnel, how to model if the lead generated in the month of January for example converts with some lag, and in upcoming months, do we just take an average?
Hey Eric, super interesting channel, has been very informative. Would you be interested in making a SaaS cap table dynamics video for us VC enthusiasts, I would greatly appreciate it! Thanks and great work on the channel!
Hey - thanks for the suggestion, I just put it on my list of ideas for building content. I think a video about cap tables, deal terms, and industry jargon like pre vs. post money etc would be helpful. Working on it!
Hey Eric, great tutorial. I have a quick question. For the churn you only caculated it at 20% of new bookings. What about the churn of recurring customers? Am I missing something?
+1 and for renewals the roll over revenue of existing customer is ignored, as the renewals are based on the new bookings/sales (unless the leads generated include both new and existing sales)
Your model has an error. You aren't showing any churn on the recurring contracts 12 months later. You are only looking at churn on new contracts, but the renewals will be up for renewal *again* in 12 months and there is no churn in your model for that.
This was so helpful! Question for you on the LTV calc -- I've seen various iterations of this formula where the LTV is calculated based on GM instead of revenue -- do you have any insight here?
GM is the correct one. Revenue doesn't pay for your CAC, GM does! Because software has such a high GM (usually), they can often end up being pretty close numbers but GM is better
i have doubt it will be helpful if you could help me if i want to take provisions where shall i take them i know its a non current liability but do we take it in cashflow also in order to tally balance sheet ?
Hi Eric. This is really a great video and explained in a more detailed manner. I have query. While calculating the LTV, haven't you considered the Gross Margin %. Second question is in case of the churn rate you have considered annual churn rate of 15%. However, the "new sales contract" based on which churn is calculated are on a monthly basis. Could you please clarify if I am missing something.
@@eric_andrews Hi Eric... fantastic video... thank you for making this. Can you explain a bit more what the change would be to correct this to use gross margin for LTV? Trying to wrap my head around it all.
Eric, this is amazing. My company also has transactional revenue, and I want to include both in a single model. Do you have a sample for that? We have a Saas line and two transactional lines, each of which will have it's own sales funnel. Thanks for this amazing content!
Sure - just build an eCommerce financial model (which is transactional) into the model as well. Here's a simple demo for the eComm model you could layer in: ruclips.net/video/KfUam8C40uY/видео.html
Can someone plz confirm this, I may be wrong haha, The model assumes customers will renew only once in the Churn Rev section, but also never gets rid of them in the Active total customers section, actually applies 0% churn to existing customers, which effects the customer support numbers. What i did was insert a cumulative contracts row, so you take last years new contracts and add to last years recurring contracts, then apply Churn% to that number to get this years recurring contracts . The churn% will be applied to both the returning from one year ago and the existing before and not just 1 year returning (you may have to check link in Active customer sec also). I am not sure if i am wrong, as i am new to this, but this would have a ripple effect through the model.
Also does the model assume only 2 tiers of pricing like a basic and Pro, since it can't do expansion on expansion? Would you then just bring forward existing expansion, apply churn% (or downgrade %), then add that to base contract renewals (after churn), then do you your new expansion on that sum?
@Dodge Caravan - Could you explain how you did this? It is straightforward to me on an annual basis, on a monthly basis I struggle a bit with accurately capturing that once renewed, they are "locked up" for another 12 months (or whatever you assume) so I cannot use last months ending balance (could apply a montly churn figure but that is not 100% accurate). The only thing I thought of was to do a waterfall for the cohorts that effectively runs each cohort down over 5 years (1/20% churn) but that is a bit painful to model. Thanks a lot!
Eric, you multiply contract size by lifetime of customer to arrive at LTV. Should we use the gross margin of the contract size instead of the contract itself?
That calculates the revenue today that you get to recognize from all the people that prepaid 12 month contracts. If someone pays you a 12 month contract up-front today, you owe them 1/12 of that contract in saas services each month for the mext 12 months. Revenue is recognized the same way. This formula is just a shortcut to calculate everything together. If you do it the long way, you'll get the same number.
Hey Eric! For some reason, my balance check is showing an accumulative score of the deferred revenue for some reason. Can you help me with this please? Am I missing something in my statements?
Hi Eric, are you aware of financial modeling apps or maybe (budget & reporting apps) that connect to accounting software like QBO and XERO. I am looking for a app that utilize the actual data from QBO and project future estimated numbers. for instance my clients, would have access to input their assumptions and the financials model will populate budget vs actual graphs and future forecasts graphs. I read about Fathom, do you think it is a good app. thanks
So I don't know specifically about that app but in general most forecasting for startups is fastest in Excel (I've tried a lot of softwares actually). When you get larger organizations with much more complex expenses sometimes the cloud software options can be better but for smaller businesses (say, less than 100 employees) Excel seems to be the fastest / most accurate in my experience...at least for now. Google sheets is also great when you are collaborating between multiple people changing assumptions.
Is there something wrong with your Churn calc Eric, I was just looking, your churned clients cals is based on the number of new clients, but should be based on a rolling total no?
Eric, this amazing model is for a SaaS product with one price tier. But in Enterprise Software and most SaaS companies there are several pricing tiers/plans, and clients usually upgrade to a higher one. Is it possible to create a video & sheet that focuses on multiple pricing tiers and the dynamics of clients moving between tiers? That would be a more accurate description SaaS sales, especially in enterprise.
Hey Elad - 100% agree that there are usually license counts, different pricing tiers, discounts for upgrades, etc - but that is pretty unique to each individual business and modeling all that usually takes quite a bit longer - it would be more of an entire course than a youtube video. My goal with this video was to show more of the overall financial dynamics of an enterprise saas business....and even with the simplified pricing it was pushing 2 hours, I can't believe people are even watching it! I'll think about what else I can do to show the process of modeling out all that detail. Thanks for the thoughtful comment and suggestion.
@@eric_andrews it can be in a sequal video to this one and a sequal shee. Not necessarily building one from scratch. I am happy to help you of you want.
@@eladleshem3790 appreciate the idea, I'm currently on a content creation break because I'm building a bigger finance for startups training program that I'm launching about 8 weeks from now. Once that is launched, I'll start creating new videos again and I put this idea on my list as I think a lot of people have this question, thanks!
I published this video on Feb 1, 2021, absolutely peak valuations haha. I was seeing 100X multiples regularly at that time, so 20X actually was pretty conservative. RIP ZIRP! That said if you have 100-200% growth with 120%+ NDR and high LTV: CAC ratios (5-10+), 15-20X multiples are still possible, although very few businesses have those kinds of metrics.
Not necessarily, it depends on how long the contracts are in the bookings. Remember to think of it as a revenue recognition. If you sell a service that lasts for 12 months, and someone pays you up front for it, you owe them 1/12 of that service every month, and you can recognize 1/12 of that revenue every month as you deliver the service. If it was a 24-month contract and they paid you up front you would be able to recognize 1/24 of it every month. So it relates to how much of the service you've actually delivered. But yes if all your contracts are 12 month contracts then yes you can simply take the total bookings over the last 12 months and divide them by 12. Easy trick 👍
@@eric_andrews in the case (as an example) of a consulting conpany who has "suscription revenue" (monthly basis), "one time sale revenue" and "IT projects revenue" (variable duración period): 1.- Can you represent all sales in the MRR metric??, or is that imposible?? 2.- How would you récord the "reveneue" and "churn" of each type? - MRR and "Churn rate" for subscriptions are easy; but I'm having peoblems to represent the "one time sales" and "projects"; do you have a video about this scenario, or any advise?? PD: You're incredible man!!!!
growing unprofitably mean that all that negative taxes can be liability until to be paid, is that correct? differed taxes has a penalty what should to do with that?
Nope - it's the opposite. It creates a tax asset that you can use to offset any future profits. For instance, if your business has $1mm in accumulated losses, when you start having positive net income you won't have to pay taxes on the first $1mm in profits. No penalties for a business that is losing money! If anything, there are benefits.
Some people suggest including marketing and creative expenses in CAC, which I believe you excluded. Thoughts on this? Is this debated or an alternative way to look at CAC?
Yeah at the end of the day CAC is flexible and you use it as a tool for you to understand your own business. For certain businesses they include their marketing expenses especially if those expenses directly touch the customers but for a lot of businesses they exclude marketing expenses that are more for administration or software for example rather than something that touches the actual customer and sales funnel. But yes it is definitely flexible and the point is to include expenses that drive sales basically
i am a bit confuse about the churn calculation, the formula is #last customer - churn + #new customer however the 12 first month confuse me how to measure it? also, lets say our Saas based on quota of units that customer buy so maybe the credits enough for more than a month sometime finish less based on the consume how to measure that?
Churn in our saas model is annual. You just look at the original customer group, and then how many of them cancel 12 months later when it is time to renew their subscription. So churn = cancellations / original customer group. In many businesses they look at churn on a monthly basis too, but with this saas model it is annual because the subscription is yearly.
You will need to start from scratch and make new assumptions for it and then model the bookings first and then the revenue and deferred revenue. Then you can just add this to the original product line and everything should flow through just fine. But you just need to replicate what we did in the video.
Should the Avg Customer LTV calc in KPI sheet be this years Annual Cost (contract selling price) * next years Churn%. In the model he uses this years Churn%, i know it doesn't matter if both numbers are the same every period, but in case they change
Hey, it needs to be divided by the churn not multiplied. If our churn is unchanging it doesn't matter, but if churn changes over the lifetime you may want to cohortize your customers and incorporate that changing stickiness over time. Hope that helps 👍
@@DodgeCaravan23 No worries, hey btw if you wanna go really deep on SaaS models (I can you are very interested) my Finance for Startups course dropping next weekend has like 7 hours of lectures specifically on SaaS going through every type of SaaS monetization and some heavy very realistic walkthroughs of how we build these things. If you're interested jump on the course waitlist, space will be limited but if you're on the wait list you get early-access to enroll: www.startupfinancecourse.com/early-access
![Build a 3-Statement Financial Model [Free Course]](http://i.ytimg.com/vi/Rmi9fwkJjHw/mqdefault.jpg)
Questions? Let me know in the comments happy to discuss.
🚀 Also, if you want to learn how to systematically scale your startup without ending up as one of the 90% of startups that fail, have a look at this ⇒ www.ericandrewsstartups.com/financeforstartups
Finally after 4 days I have completed this model I have spearing no efforts to learn Financial Start up Models Thanx a lot to upload such a valuable content lot of love from India
Eric thank you so much! It's so helpful and straightforward. You are actually producing value for people - that's already more than what 99% of startups do :)
Love to hear it that's my goal!! Thanks Elad
The best way to learn is to follow Eric when creating such model~ Build the model by myself and adapt to my own model.
@poteimiameso4455 yep, that is the best way to maximize learning....when you build yourself you will be able to then build other models yourself
This is the best financial model video ever! Thanks a lot Eric, you are doing a great job with your content here. Keep it up!
Appreciate that Iryna!! Will do
You just saved me $650, Eric. THANK YOU!
I'm so happy to hear it Bo! You are very welcome 😁
Eric...you are doing the finance lord’s work...
Hey Kay - really appreciate you checking it out and glad you got value out of it. Thanks for the support, cheers! 🙏
Thank you very much, Eric. This step-by-step tutorial is exactly what I needed to build out our financial model. Excellent work!
Glad it was helpful!
This is an absolutely amazing video and the time that you have put in to explain is incredible. Thank you for that. Definitely recommend your channel.
Hey Vassanta - I really appreciate that feedback and I'm glad this lesson was valuable for you. I'm going to keep releasing lots more videos like this this year. Cheers 🙏
Fantastic Video as always Eric!! you are really great at explaining and building awesome models! If you're interested in a even quicker excel shortcut to add new row, it's: shift+ space to highlight, then ctrl & + sign, - sign to remove row:) thanks again!
Hey cheers! Ya totally agree I use that shortcut all the time just forget sometimes when I'm recording....so much pressure!! 😅
This is like an entire college course or something. Thank you so much!
haha, that's what I like to hear!
Awesome video! Thanks for your work on this! The nerd that I am, I pretty watched ate it up in one sitting.
Hey PN - my pleasure. Thanks for nerding out with me and I'm glad it was valuable for you. Appreciate the support!! Cheers 🙏🙏
Definitely on my watchlist for this weekend!
Good to hear it Michael! I think you're gonna love this one
I'm going to suggest this for our next movie club! What a ride. Awesome video Eric - keep it coming!
Yesss!!!!! Thanks for going on that ride with me Duncan, ready to build the next SaaS unicorn now ?? 😎😎😎
Hey man, i just got one thing to say, i love you, thanks a ton!
43:06 shift+space to highlight row followed by ctrl+shift+"+" is a faster way of doing it. Don't need to click alt
Also, for 44:05 you should probably use the pretax salary and not use after tax and just add the tax amount. I think the final value would be less than the total amount you're paying for them.
e.g. assume 30% tax, you pay them 100k annual before tax. If you deduct 30%, you're left with 70k.
But if you start with 70K and you add 30%, it would become 91k
Wow, youre a champion - thank you so much Eric!
What about a transactional product that only takes about 1-3 weeks to close ? How would you format the sheet?
Thank you so much Eric! This is so valuable as I'm working in a startup and trying to make sense of all the number. Keep going :)
So glad to hear it! Thanks and more videos coming out soon 😎
Thanks a lot Eric its so valuable I can't even Imagine, I think God Has Suggested me your Channel. I am so Grateful 😇
I'm really glad it helped you!!!
This is extremely valuable resource I came across. Thank you so much eric.
You are very welcome!!
Thanks a lot, Eric. I'm really greatful, it was suppper helpful for my graduation project financial model!!
This is great Eric. Thanks for walking us through this step by step.
Glad it was valuable Jay, cheers!
Nice Eric..but I want to give you one suggestion is to make appearance of your models more appealing plz make a video on this also..How make models more visually appealing
You'll see in my newer videos I'm putting a bit more effort into that :)
Hey Eric, this is a great content. Thank you for the Education.
My pleasure, happy to help Hicham and glad you found it valuable.
Maybe I'm missing something but it seems as though the model is only capturing the recurring revenue on 1 year of the renewal, and not on any subsequent year renewals. For example, for the first two contracts in M13, we recognize additional revenue related to them in M25. If those contracts renew and pay for an additional year in M37, I don't believe this model captures that revenue. Can you confirm? I'm building something out for myself and I noticed this.
Can someone plz confirm this, I may be wrong haha, but Insert a cumulative contracts row, so you take last years new contracts and add to last years recurring contracts, then apply Churn% to that number to get this years recurring contracts and onward. The churn% will be applied to both the returning new and the existing and not just new (you may have to check link in Active customer sec also). The model assumes customers will renew only once in the Churn Rev section, but also never gets rid of them in the Active total customers section, actually applies 0% churn to existing customers, which effects the customer support numbers. I am not sure if i am wrong, as i am new to this, but this would have a ripple effect through the model.
Also the NDR calc only looks at growth for new contracts not existing ones that have been renewing for years.
Absolutely correct. Just commented too. If you extend the model 2 more years and reduce ad-spend to 0 and make churn rate 0%, the ARR goes to 0 lol.
Its only the people who are actually trying to apply this that got this mistake. The author basically got caught up with the 12-mo contract duration trick and forgot that renewals should roll over from year to year haha
OMG! Thank you so much. I love the comprehensive explanation and simplicity as well. Thank you.
Eric, Do you provide any startup consultation?
Awesome content Eric. Great lesson for starting businesses, these are invaluable info!
I'm glad it was valuable for you, cheers!
Amazing watch and easy to follow through
Glad you enjoyed it!
So helpful
Loved this video! Please keep sharing stuff like this
Absolutely will!!
I just want to say THANK YOU! this is a great video
You are so welcome!
Thanks a lot. Your explanations are really great!
Really glad to hear it Madina!! Thanks for the comment
Very useful, thanks Eric. 2 questions...
1. Any tips on how to include receiving 50% of the annual subscription upfront (instead of 100%) with the remainder on monthly instalments?
2. Implementation charges (50% of our customers typically pay a notable set up fee)?
1 - Yes you would effectively need to combine a lump sum payment (and associated deferred revenue) like we showed in the video but then add a regular monthly payment subscription model to it. You could do this by cohortizing the model, it's a bit more complex but nothing crazy. The only tricky part would be the deferred revenue.
2 - Yes at the conversion event you would effectively just include a lump sum implementation fee. So you could put in an assumption (say $20K) and add that in any time a customer converts.
Hi Eric! Thanks for the in-depth video. I had a couple questions: 1). Shouldn’t MRR be sum(total recurring revenue over past 12 months)/12 instead of sum(total bookings over past 12 months)/12? Unless I’m thinking of “recurring” too literally. 2). How did you figure out that our current customers are profitable and most of the cash burn is coming from onboarding new customer?
Sure. Here are my replies -
(1) the formula in the video is correct, but its a shortcut. If you take each monthly of bookings over the last 12 months, knowing that each month is a pre-payment for 12 months of service (service = revenue), if you do that the long way with a big waterfall you will get the same mathematical result as my formula.
For the mrr question, the MRR is just thus month's revenue, no averages.
(2) with SaaS, all customers are fundamentally very profitable at the gross margin level. The issue is you have this giant investment at the beginning to market to them, but once you've acquired them (that is your customer acquisition cost), there is no more marketing cost because they are on a subscription. So you basically lose a bunch of money on marketing and make it back + more over their long relationship with your company.
Super informative video. Thanks for the hard work, keep going!!
Cheers, will do 💪💪💪
This is Gold. Thanks so much Eric
Glad it was helpful!
Thanks for sharing this model and the insights. For inserting a line I have a faster shortcut "Ctrl"+ "+" or "Ctrl"+ "Shift"+"+="
Agree thanks!
So grateful for these videos, Eric. Thanks man
Really glad to hear that they are valuable Olumide. I appreciate the comment and it's my pleasure to help
Aren't you only applying churn to the contracts that are newly signed? Don't the recurring contracts need churn applied to them incrementally after the year is over after for those that renew?
Your walkthrough is on point!
:) awesome!!
Great content Eric! Thanks for sharing.
Epic one! Loving the walkthrough. Thanks Eric!
My pleasure Keyspan...thanks for checking it out!!
Eric thank you so much for these videos. I appreciate your content, teaching and insights.
You are very welcome Jacob. Glad to hear it.
Great vid! Thank u so much!
I'm glad it was helpful!
Hi Eric, nice video. Maybe a video on tools for information gathering or comps analysis and including them in modelling for risk assessment?
Thank you so much for your education and time! Very valuable content!
My pleasure 👍
Eric... Very Nice Job!
appreciate it tracey!
Great video. Just cant seem to find the sales and acquisition data that have the assumptions. thanks
Great video bud!
Eric, thanks for sharing! Very good content, thanks for the education you are providing to us.
It's my pleasure Deivid, glad it was valuable for you 👍
Thanks for watching
Thank you Eric for this amazing video! One question though... Are we not supposed to recognize the deferred revenue as actual revenue in the following months sort of in a cohort way dragging it month by month? You left it as deferred rev all the way but we have already delivered our service by the end of the year.
Exactly. It would be incorrect never to convert deferred revenue to actual revenue, right?
Hi Andrew, why we have not added new booking and recurring booking after calculating both? check 15.38 mins video duration.
Nice content!! Keep it going Eric, tkss
I will! Appreciate that Iago!
Another point on enterprise sales, it's sales driven rather than advertising, so in customer acquisition comes mostly (if not only) from sales development. Is it possible to add that in a new video & sheet about enterprise software?
The current model focuses on leads coming from ad spend, but in enterprise software leads come from outbound sales, and are probably a function of how many sales development reps you have (Leads / SDR) , not of a $ budget on ad spend. What do you think?
Thank you Eric!
You got it!
thank you so much. I can't believe how useful this is. I am an MBA student and this will be so incredibly helpful as I build a financial model for a real startup. Question for you - how do you recommend capturing teh implementation costs for a saas business? the startup I am looking at has a fairly substantial upfront implementation / setup cost for each new customer. Any recommendations on how to incorporate this into your model?
Glad to hear it. For sure for implementation revenue you would just create another revenue line and could create a formula that puts in $X implementation revenue after you convert a new customer.
thanks eric!
downloaded model still has the recurring contract error where it's not accounting for renewals after the 1st time...
Hi Eric, could you please explain in brief how to model if the saas company bills the customer by volume and is not a subscription contract, e.g AI voice bot company that charges the customer on the number of texts or call duration? Also, from the sales funnel, how to model if the lead generated in the month of January for example converts with some lag, and in upcoming months, do we just take an average?
Hey Eric, super interesting channel, has been very informative. Would you be interested in making a SaaS cap table dynamics video for us VC enthusiasts, I would greatly appreciate it! Thanks and great work on the channel!
Hey - thanks for the suggestion, I just put it on my list of ideas for building content. I think a video about cap tables, deal terms, and industry jargon like pre vs. post money etc would be helpful. Working on it!
Hey Eric, great tutorial. I have a quick question. For the churn you only caculated it at 20% of new bookings. What about the churn of recurring customers? Am I missing something?
+1 and for renewals the roll over revenue of existing customer is ignored, as the renewals are based on the new bookings/sales (unless the leads generated include both new and existing sales)
Awesome info
Your model has an error. You aren't showing any churn on the recurring contracts 12 months later. You are only looking at churn on new contracts, but the renewals will be up for renewal *again* in 12 months and there is no churn in your model for that.
Thank you for this!
My pleasure Ben!
Hi Eric, great job! I just want to check with your on those Upgrades (the Uptrading or Cross Selling) how to account for those? Thank you!
Hey! Yes those are captured in the "expansion" revenue in the model. If you wanted to model them separately you could break it into two buckets.
good concept
This was so helpful! Question for you on the LTV calc -- I've seen various iterations of this formula where the LTV is calculated based on GM instead of revenue -- do you have any insight here?
GM is the correct one. Revenue doesn't pay for your CAC, GM does! Because software has such a high GM (usually), they can often end up being pretty close numbers but GM is better
i have doubt it will be helpful if you could help me if i want to take provisions where shall i take them i know its a non current liability but do we take it in cashflow also in order to tally balance sheet ?
Hi Eric. This is really a great video and explained in a more detailed manner. I have query. While calculating the LTV, haven't you considered the Gross Margin %. Second question is in case of the churn rate you have considered annual churn rate of 15%. However, the "new sales contract" based on which churn is calculated are on a monthly basis. Could you please clarify if I am missing something.
Yes you should use gross margin for LTV, that was my mistake.
@@eric_andrews Hi Eric... fantastic video... thank you for making this. Can you explain a bit more what the change would be to correct this to use gross margin for LTV? Trying to wrap my head around it all.
Eric need your help in my SAAS projection is coming wrong. Please help me ..
Eric, this is amazing. My company also has transactional revenue, and I want to include both in a single model. Do you have a sample for that? We have a Saas line and two transactional lines, each of which will have it's own sales funnel. Thanks for this amazing content!
Sure - just build an eCommerce financial model (which is transactional) into the model as well. Here's a simple demo for the eComm model you could layer in: ruclips.net/video/KfUam8C40uY/видео.html
Can someone plz confirm this, I may be wrong haha, The model assumes customers will renew only once in the Churn Rev section, but also never gets rid of them in the Active total customers section, actually applies 0% churn to existing customers, which effects the customer support numbers. What i did was insert a cumulative contracts row, so you take last years new contracts and add to last years recurring contracts, then apply Churn% to that number to get this years recurring contracts . The churn% will be applied to both the returning from one year ago and the existing before and not just 1 year returning (you may have to check link in Active customer sec also). I am not sure if i am wrong, as i am new to this, but this would have a ripple effect through the model.
Also does the model assume only 2 tiers of pricing like a basic and Pro, since it can't do expansion on expansion? Would you then just bring forward existing expansion, apply churn% (or downgrade %), then add that to base contract renewals (after churn), then do you your new expansion on that sum?
Ya actually it was a small mistake I made in the recording and you are doing it right, nice catch.
@Dodge Caravan - Could you explain how you did this? It is straightforward to me on an annual basis, on a monthly basis I struggle a bit with accurately capturing that once renewed, they are "locked up" for another 12 months (or whatever you assume) so I cannot use last months ending balance (could apply a montly churn figure but that is not 100% accurate). The only thing I thought of was to do a waterfall for the cohorts that effectively runs each cohort down over 5 years (1/20% churn) but that is a bit painful to model. Thanks a lot!
Very good model and thank you for doing this. But how do I download the excel model
Sure, right there in the description there is a link.
Eric, you multiply contract size by lifetime of customer to arrive at LTV. Should we use the gross margin of the contract size instead of the contract itself?
@poteimiameso4455 yes correct that was a mistake i made
Why won't you use CTRL + - to delete row and CTRL + shift + to add ?
Yep, that is faster. I just forget sometimes.
For the MRR build, why do we sum the previous 12 periods of bookings? Whats the intuition
That calculates the revenue today that you get to recognize from all the people that prepaid 12 month contracts. If someone pays you a 12 month contract up-front today, you owe them 1/12 of that contract in saas services each month for the mext 12 months. Revenue is recognized the same way. This formula is just a shortcut to calculate everything together. If you do it the long way, you'll get the same number.
Merci!
Hey Eric! For some reason, my balance check is showing an accumulative score of the deferred revenue for some reason. Can you help me with this please? Am I missing something in my statements?
This is greaat!!!! Thanks!
Happy to help sergio!
la sen ne güzel adamsın ya
Thanks brother, that's content super educational and gracefully open source.
Hi Eric, are you aware of financial modeling apps or maybe (budget & reporting apps) that connect to accounting software like QBO and XERO. I am looking for a app that utilize the actual data from QBO and project future estimated numbers. for instance my clients, would have access to input their assumptions and the financials model will populate budget vs actual graphs and future forecasts graphs. I read about Fathom, do you think it is a good app. thanks
So I don't know specifically about that app but in general most forecasting for startups is fastest in Excel (I've tried a lot of softwares actually). When you get larger organizations with much more complex expenses sometimes the cloud software options can be better but for smaller businesses (say, less than 100 employees) Excel seems to be the fastest / most accurate in my experience...at least for now. Google sheets is also great when you are collaborating between multiple people changing assumptions.
@@eric_andrews Thanks Eric.
Is there something wrong with your Churn calc Eric, I was just looking, your churned clients cals is based on the number of new clients, but should be based on a rolling total no?
Yes that was a small mistake I made nice catch.
Hi Eric～great work～can I know where I can download the Excel?
@@Tiffanyonfire in the description
Eric, this amazing model is for a SaaS product with one price tier. But in Enterprise Software and most SaaS companies there are several pricing tiers/plans, and clients usually upgrade to a higher one. Is it possible to create a video & sheet that focuses on multiple pricing tiers and the dynamics of clients moving between tiers? That would be a more accurate description SaaS sales, especially in enterprise.
Hey Elad - 100% agree that there are usually license counts, different pricing tiers, discounts for upgrades, etc - but that is pretty unique to each individual business and modeling all that usually takes quite a bit longer - it would be more of an entire course than a youtube video. My goal with this video was to show more of the overall financial dynamics of an enterprise saas business....and even with the simplified pricing it was pushing 2 hours, I can't believe people are even watching it! I'll think about what else I can do to show the process of modeling out all that detail. Thanks for the thoughtful comment and suggestion.
@@eric_andrews it can be in a sequal video to this one and a sequal shee. Not necessarily building one from scratch. I am happy to help you of you want.
@@eladleshem3790 appreciate the idea, I'm currently on a content creation break because I'm building a bigger finance for startups training program that I'm launching about 8 weeks from now. Once that is launched, I'll start creating new videos again and I put this idea on my list as I think a lot of people have this question, thanks!
@@eladleshem3790 I'm specifically designing a whole module about this in the course I'm getting ready to launch on November 14, Finance for Startups.
good job
Can you a SMB model? maybe $10M-50M valuation?
9:42 well 20x multiples are long gone
I published this video on Feb 1, 2021, absolutely peak valuations haha. I was seeing 100X multiples regularly at that time, so 20X actually was pretty conservative. RIP ZIRP!
That said if you have 100-200% growth with 120%+ NDR and high LTV: CAC ratios (5-10+), 15-20X multiples are still possible, although very few businesses have those kinds of metrics.
I have a question: when calculating MRR, why should it add all previous Total Bookings together? Shouldn’t it be just previous 12Months?
Not necessarily, it depends on how long the contracts are in the bookings. Remember to think of it as a revenue recognition. If you sell a service that lasts for 12 months, and someone pays you up front for it, you owe them 1/12 of that service every month, and you can recognize 1/12 of that revenue every month as you deliver the service. If it was a 24-month contract and they paid you up front you would be able to recognize 1/24 of it every month. So it relates to how much of the service you've actually delivered. But yes if all your contracts are 12 month contracts then yes you can simply take the total bookings over the last 12 months and divide them by 12. Easy trick 👍
@@eric_andrews in the case (as an example) of a consulting conpany who has "suscription revenue" (monthly basis), "one time sale revenue" and "IT projects revenue" (variable duración period):
1.- Can you represent all sales in the MRR metric??, or is that imposible??
2.- How would you récord the "reveneue" and "churn" of each type?
- MRR and "Churn rate" for subscriptions are easy; but I'm having peoblems to represent the "one time sales" and "projects"; do you have a video about this scenario, or any advise??
PD: You're incredible man!!!!
growing unprofitably mean that all that negative taxes can be liability until to be paid, is that correct? differed taxes has a penalty what should to do with that?
Nope - it's the opposite. It creates a tax asset that you can use to offset any future profits. For instance, if your business has $1mm in accumulated losses, when you start having positive net income you won't have to pay taxes on the first $1mm in profits. No penalties for a business that is losing money! If anything, there are benefits.
Hi guys, could you please share the excel template fo that? THanks in advance!
It's right there in the description available for free
Some people suggest including marketing and creative expenses in CAC, which I believe you excluded. Thoughts on this? Is this debated or an alternative way to look at CAC?
Yeah at the end of the day CAC is flexible and you use it as a tool for you to understand your own business. For certain businesses they include their marketing expenses especially if those expenses directly touch the customers but for a lot of businesses they exclude marketing expenses that are more for administration or software for example rather than something that touches the actual customer and sales funnel. But yes it is definitely flexible and the point is to include expenses that drive sales basically
I have got an offer for this job. Can someone please tell me the scope for this job or growth & salary
i am a bit confuse about the churn calculation, the formula is #last customer - churn + #new customer however the 12 first month confuse me how to measure it? also, lets say our Saas based on quota of units that customer buy so maybe the credits enough for more than a month sometime finish less based on the consume how to measure that?
Churn in our saas model is annual. You just look at the original customer group, and then how many of them cancel 12 months later when it is time to renew their subscription. So churn = cancellations / original customer group. In many businesses they look at churn on a monthly basis too, but with this saas model it is annual because the subscription is yearly.
Where is the patent and lisencing cost included?
Usually that would be sitting on your balance sheet as IP, if you have it
great
Click-i-est keyboard on RUclips 😆 great video though, thank you!
The keyboard is the piano of finance people
😅
@@eric_andrews totally!
Hey Can you help me how to add another revenue stream in the same model above?
You will need to start from scratch and make new assumptions for it and then model the bookings first and then the revenue and deferred revenue. Then you can just add this to the original product line and everything should flow through just fine. But you just need to replicate what we did in the video.
Your excel download of the model is not working
Just wait 5 minutes, it works
Should the Avg Customer LTV calc in KPI sheet be this years Annual Cost (contract selling price) * next years Churn%. In the model he uses this years Churn%, i know it doesn't matter if both numbers are the same every period, but in case they change
Hey, it needs to be divided by the churn not multiplied. If our churn is unchanging it doesn't matter, but if churn changes over the lifetime you may want to cohortize your customers and incorporate that changing stickiness over time. Hope that helps 👍
Wow thanks! same day answer, amazing!! yea i meant * by 1/churn% my bad thanks again!!!
@@DodgeCaravan23 No worries, hey btw if you wanna go really deep on SaaS models (I can you are very interested) my Finance for Startups course dropping next weekend has like 7 hours of lectures specifically on SaaS going through every type of SaaS monetization and some heavy very realistic walkthroughs of how we build these things. If you're interested jump on the course waitlist, space will be limited but if you're on the wait list you get early-access to enroll: www.startupfinancecourse.com/early-access
thanks!! Ill check it out
@@DodgeCaravan23 👍