17 Financial KPIs Every SaaS Company Needs To Track

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If you're diving into the SaaS world, you'll quickly realize that it's not just about having an amazing product; it's also about understanding the nitty-gritty numbers that make everything tick aka financial KPIs. 

Imagine these numbers as the backstage crew of a concert – they make sure the lead singer (your product) delivers a show-stopping performance. I know, delving into financial KPIs can feel like navigating a maze sometimes. 

But, let's keep it light and fun. Walk with me as we unravel the 17 financial threads that will help keep your SaaS venture stitched together. By the end, you'll be navigating this finance maze like a pro business owner. Ready to get weaving? 

But first, let’s understand what finance KPIs are exactly and why you need them.

What are financial KPIs & why do you need them?

Financial KPIs (Key Performance Indicators) are valuable tools that help you measure and assess your business’s financial performance. It provides a snapshot of your company’s financial health and operating profit margins, including direct costs and administrative expenses. 

These metrics measure performance over time, including trends, and facilitate strategic financial decisions. Finance and marketing KPIs are tracked regularly, even on an annual basis to get a sense of the annual growth rate and revenue growth rate. These metrics include: 

  • Current ratio
  • Profit margin
  • Return on assets
  • Return on investment

Other key metrics like earnings per share, revenue into profits, and conversion rate of assets into cash also provide a clear picture of your core operations and operational efficiency. They help in assessing your actual expenses, production efficiency, and future profits.

If you're wondering why everyone is absorbed deep in finance KPIs, here's the lowdown: Think of them as your business's health check-up. They give you a heads-up on how your sales are doing, your business environment’s vibe, and even point out new ways to make money. 

In simpler terms, these KPIs show if your business is hitting its goals or if it's time for a little tune-up. It's like having a dashboard for how well your company is cruising along. 

Let's break it down:

When looking at those financial KPIs and sales growth stats, it's not just about chasing numbers. It's like piecing together a story of how your business has been doing. With that story in hand, you'll be all set to make smart choices to boost your business and keep things running smoothly for the long haul. 

Now to the best part. Let’s dive deep into the most important KPIs you need to track. 

17 Financial KPIs you should track

As we dive deep into each of these 17 key metrics. You'll uncover their hidden insights, discover practical strategies to implement, and gain a competitive edge in today's cutthroat landscape. Try to pick out the most relevant metrics to analyze to reach your business goals.

1. Profit margin 

Profit margin provides actionable insights into how effective your pricing strategy and cost management are. For instance, a retailer may find that an increasing profit margin points to a successful strategy of targeting high-value customers or negotiating favorable contracts with suppliers. The formula is: 

Profit margin = Net income ÷ Net sales x 100 

The profit margin also contributes to return on equity, a crucial measure of profitability from the owners’ perspective.

This could be because of high-profit margins or effective management of equity capital.

Financial statements are a treasure trove of information for these metrics. Reading through the income statement, you can identify the average of current accounts payable and receivable periods. 

You might want to shorten the average accounts payable period to improve cash flow. Also, look for ways to incentivize customers to shorten the average accounts receivable period so they can improve their working capital management.

2. Customer engagement score

This score isn't just about logging in or time spent in the software; it's about how many customers are using and benefiting from your product. You want to see users engaging with key features and gaining value. It doesn't have a standard formula, as it can be calculated differently based on a company's specific engagement metrics.

This KPI helps you identify which features drive engagement and which ones might need improvement. Are there features that users barely touch? Are there some features that, once used, cause a spike in usage or improve customer retention? 

This data is vital for driving product development and training resources. A sudden drop in engagement might also provide an early warning sign of increased churn, providing an opportunity for proactive customer retention strategies.

Remember to also continuously improve and refine the features that drive engagement to adapt to the ever-evolving needs of your customers. 

3. Customer lifetime value (CLV)

Customer Lifetime Value (CLV)

CLV is a way to measure the total value a customer brings to your business over the entire duration of their relationship with you. It goes beyond the initial purchase and considers the potential for repeat purchases, upsells, and referrals over the entire customer lifespan. 

It's calculated using this formula: 

CLV = Average Purchase Value x Average Purchase Frequency x Average Customer Lifespan. 

A higher CLV means each customer is worth more to your business, so you can decide to increase your spending on customer retention programs or invest more in acquiring similar customers. This means readjusting your business plan

Understanding CLV identifies the commonalities and behaviors of your most valuable customers and understands what makes these customers different from others. 

4. Customer acquisition costs (CAC)

CAC is the cost of convincing a potential customer to buy a product or service. It includes costs like marketing, sales, operating expenses, salaries, overhead labor costs, logistic solutions, and more. Not calculating customer acquisition cost (CAC) can be a risky move. You may end up acquiring leads that cost you a fortune or, even worse, find yourself unable to afford as many customers as you'd like. 

Many companies fall into this trap by solely relying on their financial reporting on platforms like Google or Facebook to evaluate their cost per conversion. But when you're all about improving customer lifetime value, those reports just don't cut it. You need a more complete picture.

Customer Acquisition Costs (CAC)

That's where CAC comes into play. It's the most reliable metric when you want to:

  • Compare costs with customer value: You can evaluate whether the value a customer brings to your company outweighs the cost of acquiring them. It's like determining if that shiny new customer is worth the investment.
  • Calculate the real cost of acquiring new customers: It's not just about how much you spend on ads or marketing tools. You need to consider marketing wages, agency fees, overhead costs, and more. Crunching those numbers will give you a better understanding of the actual costs involved.

The formula for calculating CAC is: 

CAC = Total Cost of Sales and Marketing ÷ Number of New Customers Acquired. 

Let's consider an example to understand CAC better. Imagine you run an eCommerce lingerie shop. Your CAC would encompass expenses like marketing campaigns, influencer collaborations, website development, and customer acquisition tools.

By analyzing these costs concerning the number of new customers acquired, you can calculate your CAC. This metric provides valuable insights into how efficient your customer acquisition strategy is and helps you make a strategic decision about allocating resources.

For instance, if your CAC is too high, it might indicate that your marketing campaigns or acquisition channels are not yielding the desired results. In this case, you could explore optimizing your marketing spend, refining your targeting strategies, or identifying more cost-effective acquisition channels.

On the other hand, a low CAC might suggest that your marketing efforts are efficient and cost-effective, enabling you to acquire customers at a lower cost. This can be an opportunity to invest further in customer acquisition or explore expanding your marketing reach to attract even more potential customers.

The churn rate isn't just about counting lost customers, it's an opportunity to find out why they left. Is it because of the product quality? Poor customer service? Or are competitors luring them away? Identifying trends and patterns in churn helps you take the needed action to prevent future customers from churning and manage subscriptions better.

5. Average sales price (ASP)

With the ASP, we're tracking the average price your clients are paying for your product. But it's much more than a simple average. Its formula is:

ASP = Total Sales Revenue ÷ Number of Units Sold

The ASP is a rich seam of data that can uncover insights into your clients' behavior, their perception of your product's value, and your pricing strategies. If your ASP is trending upwards, it means customers find high value in your offers, which could indicate room for a potential price increase. 

On the contrary, a dipping ASP might require a review of your product or pricing model. You might be facing heavy competition, or maybe you're not sufficiently demonstrating the value of your product to your customers.

By segmenting your ASP by customer demographic, product version, or region, you can reveal specific areas that might be under or overpriced.

6. Churn rate

The churn rate represents the percentage of subscribers who discontinue their subscription within a given period. The formula is: 

Churn rate = Number of Customers at the Beginning - Number of Customers at the End ÷ Number of Customers at the Beginning

Churn Rate

A high churn rate is like a leak in a bucket; you can keep pouring in new customers, but if you can't hold onto them, your growth will hit a roadblock. 

The churn rate isn't just about counting lost customers, it's an opportunity to find out why they left. Is it because of the product quality? Poor customer service? Or are competitors luring them away? Identifying trends and patterns in churn helps you take the needed action to prevent future customers from churning. 

Also, remember to differentiate between voluntary churn (customers who actively chose to cancel) and involuntary churn (cancellations because of failed payments), as each requires different mitigation strategies.

7. Cost per feature ratio

Understanding your Cost Per Feature Ratio calculates the cost-efficiency of your product features. It helps you determine which features are worth investing in and which ones might be draining resources without providing enough return. It’s calculated by: 

Cost per feature ratio = Total feature development cost ÷ number of users engaging with the feature

This ratio is particularly valuable in software development as it guides where to invest for the highest ROI. But it's not just about the financial cost. You also need to consider the opportunity cost - if your developers are spending time maintaining a barely used feature, they're not developing new, potentially more valuable features. 

Also, too many unnecessary features can make your product confusing and difficult to use, potentially decreasing your engagement and increasing churn.

8. Lead velocity rate

Lead Velocity Rate measures the month-over-month growth in qualified leads. Calculate it as follows: 

Lead Velocity = Number of Qualified Leads This Month - Number of Qualified Leads Last Month) ÷ Number of Qualified Leads Last Month.

In a rapidly changing digital landscape, historical data can quickly become out of date. So, having real-time insight into your sales pipeline is invaluable for predicting future sales. 

A slowing LVR might suggest that your marketing campaigns are losing their effectiveness or that a new competitor entered the market. Alternatively, a sudden increase might indicate a successful campaign or an emerging market.

By segmenting your LVR by lead source, you can identify the most valuable channels and reallocate resources to maximize ROI.

9. Lead to customer rate

Your Lead to Customer Rate is your sales team's report card. This rate is calculated as follows: 

Lead customer rate = Number of new customers ÷ number of leads x 100%

It shows how effective your sales team is at converting interested leads into customers. An upward trend shows your sales process is effective and your team is turning interested prospects into customers. But, a downward trend could signal that there may be obstacles in your sales process preventing the smooth conversion of leads into customers.

Maybe your leads are not well-qualified, your business model needs tweaking, or your sales tactics need a refresh. You might even be targeting the wrong demographic. Break this down rate by sales team or individual salesperson to identify who's excelling and who might need extra training. 

Also, consider your sales team's performance. Your lead-to-customer rate is a key indicator of how well your sales team converts interested leads into actual customers. It tells you how effective your team is at turning potential prospects into paying customers. Perhaps you might need to reassess your hiring strategies. 

10. Average sales cycle length

The Average Sales Cycle Length, the period from first contact with a lead to closing a deal, is a direct reflection of your sales process efficiency. If it's too long, you might be spending excessive resources on converting leads. Or worse, you might be losing them mid-process to competitors with quicker turnarounds. 

Shortening this cycle length can dramatically improve your sales efficiency and revenue growth. But be cautious. Rushing leads through the sales cycle could cause under-prepared customers, which might then increase churn. Monitor your sales cycle length closely and adjust your strategies based on the insights gained.

11. Net promoter score (NPS)

NPS is more than just a loyalty metric—it's a leading indicator of growth. It’s calculated as:

NPS = Percentage of Promoters - Percentage of Detractors

Customers who rate your product highly are more likely to refer others and less likely to churn. But don't just look at the score itself. Look at the trends and feedback associated with it. 

Net promoter score (NPS)

Are scores improving or declining? Why did certain customers rate you low or high? These insights can highlight areas of improvement or strength in your product, service, or customer experience. Remember, while getting a high score is great, the real value lies in acting on the feedback from the NPS survey to continually improve your offer.

12. Average revenue per user (ARPU)

ARPU is a snapshot of how much value you're extracting from your users. By tracking ARPU, your finance team can assess the success of your upsell and cross-sell strategies and evaluate your pricing structure. 

To calculate ARPU use this formula:

ARPU = Total revenue ÷ number of users

This is a basic formula for business operations insights.

If ARPU is increasing, it might be a good time to consider introducing premium features or services. If it's decreasing, you may either be attracting lower-value customers or failing to fully monetize existing ones.

Remember to segment your ARPU by user type (new vs. existing) or by product version to gain deeper insights into your revenue patterns.

13. Quick ratio

The Quick Ratio is a reality check on your company's financial health, specifically its ability to cover financial obligations and short-term liabilities with liquid assets. This measure, derived from your balance sheet and factored into your current budget, is calculated as follows:

Quick Ratio = Cash + Marketable Securities + Accounts Receivable ÷ Current Liabilities

An improving quick ratio shows increasing financial robustness, which could be because of higher revenues, efficient collection practices, or effective management of payables. 

A deteriorating Quick Ratio might signal cash flow problems, potentially causing the need for a business loan. Track this ratio over time and compare it with industry peers to benchmark your business performance.

14. Number of reactivations

The average time between the number of reactivations is a testimony to your product's enduring appeal. This metric measures the customers who, having canceled their subscription, decided to return. Its formula is: 

Reactivate Rate = Number of Reactivated Users ÷ Number of Churned Users x 100

High reactivation numbers suggest that customers continue to find value in your service, even after exploring alternatives. 

For example, consider subscription-based services like a dog training boot camp or a pet insurance service. If many customers who once canceled their subscriptions decide to return, it suggests that they have tried other dog care services but find yours to be the most effective. 

The owners see the lasting change in their dogs' behavior, and even after exploring other options, they return because of the unparalleled value they found in this particular boot camp.

Analyzing reactivated customers can provide insight into what initially drove them away and what brought them back, offering valuable information to retain current customers and reactivate more former ones.

15. Current ratio 

The current ratio is another important financial metric that evaluates a company's ability to pay off its obligations with its most liquid assets.  Tracking the current ratio can help businesses ensure that they maintain sufficient liquidity to cover unexpected costs or downturns. It’s calculated as:

Current Ratio = Current assets ÷ current liabilities

In our lingerie retailer example earlier, the current ratio might reveal whether they have sufficient current assets to cover the accounts payable for inventory purchases, indicating financial stability.

16. The acid test ratio

The acid test ratio, also known as the quick ratio, is another important financial metric that complements the current ratio by excluding inventory from current assets. The formula is: 

Acid Test Ratio = Cash + Short Term Investments + Current Receivables - Inventory - Prepaid Expenses ÷ current liabilities

It can provide a more conservative view of a company's short-term liquidity. In businesses where inventory turnover is slow, this metric can be especially informative.

All these financial metrics combined help businesses build a solid foundation for achieving financial goals. For instance, the SaaS company's financial goals might include improving the average revenue per user (ARPU) or customer lifetime value (CLV). 

A higher ARPU or CLV would suggest that each customer is more profitable, and hence the company might want to invest more in customer acquisition or retention programs.

17. Cash conversion cycle (CCC)

Cash Conversion Cycle (CCC)

The CCC isn't just about calculating the time it takes for a company to convert resources into cash flows; it's about understanding how efficient your inventory management, sales, and accounts payable processes are. The formula is: 

CCC = Days Inventory Outstanding + Days Sales Outstanding + Days Payable Outstanding 

It reflects how well your business is leveraging its operational activities to create value. The formula for CCC varies from company to company based on their specific operational metrics. 

Tracking this metric will also be helpful if you’re planning or are already diversifying your income streams and investing in stocks, bonds, and trading. Knowing when you’ll have the funds for these additional income sources will contribute to making better financial decisions

Conclusion

When considering which KPIs to track, identify the key objectives and priorities for your SaaS company. Are you focused on revenue growth, customer retention, or profitability? Select KPIs that directly align with these goals to measure progress accurately.

You also want to start with tracking fundamental financial KPIs such as Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV), Customer Acquisition Cost (CAC), and Churn Rate. These metrics provide a solid foundation for understanding your company's financial performance and can help identify areas for improvement.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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