Over the last two decades, we’ve witnessed an explosion of an entirely new sector in tech. SaaS (Software as a Service) companies of all shapes and sizes, from giants like Salesforce to solo developers working out of their bedrooms, have marched onto the global stage with unstoppable momentum. Today, software services compose a significant slice of the global economy.

Two Decades of Development

In 1999, entrepreneurs were developing innovative ways to provide software services through the internet. In 2005, Salesforce launched AppExchange as a platform for SaaS apps. This only made it easier for new developers and creators to engage with a hungry software market.

As of 2021, SaaS has reached a stunning $169 billion USD global market valuation. It’s expected to reach $186 billion by the end of 2022. To put this in perspective, the market size of social media companies as of 2021 was $159 billion USD. There’s no denying that there is demand for new cloud-based software services, and the market is responding.

Special Financial Characteristics

Financially, SaaS companies possess unique characteristics. For one thing, revenue is much easier to track and projections are more reliable. Subscription pricing models make ARR (annual recurring revenue) an important metric and consistent guide for investors. 

From the outset, SaaS companies have fascinated financial experts. Reliable ARR combined with rapid scalability potential leads to incredible financial growth. 

Repeatability in SaaS is different from repeatability in manufacturing or even other service industries. SaaS firms are able to manage high volumes of transactions more easily than other sectors. Scalability means that if a service meets existing demand, it can scale fast and meet all of that demand. There are no issues with time limitations. If the demand exists and the company can meet it, thereby taking over all its potential market share.

The ability to reliably track ARR and then present it to investors adds a high level of attractiveness for those seeking stable investments. Whether it’s a monthly subscription or a yearly purchase, ARR allows financial analysts to project and model more simply and accurately than they might be able to do in other fields.

Fractional CFOs and SaaS

SaaS’s unique revenue profile and scalability leads to interesting financial strategies. From the very beginning, CFOs understood that a SaaS company’s ability to access capital was tied to its ability to generate MRR (monthly recurring revenue) and ARR (annual recurring revenue). This is where tracking and reporting came in. SaaS CFOs implemented detailed revenue reporting mechanisms that allowed SaaS companies to accurately present their M/ARR to their stakeholders. Investors loved this! 

The relationship between SaaS and CFOs also created a second lesson that has creeped into other areas of the economy. Since M/ARR are such important metrics for investors and thereby a company;s  access to capital, pricing models for almost everything (including bookkeeping services!) have evolved into subscriptions rather than purchases.

Revenue-based financers are big fans of SaaS companies precisely because of M/ARR. CFOs understood this and leveraged it to the advantage of promising companies. 

As SaaS firms progress through the various growth stages, their financial needs change. In the beginning, they might need fast and accessible cash to bring their product to market and generate a base MRR. Later they are able to leverage established MRR for larger investments. CFOs are able to understand the different stages and optimize cash flow for each stage of growth

Fractional CFOs and SaaS

As we’ve already mentioned, the SaaS business model is particularly good at scaling, provided all the pieces are in place. Scaling isn’t just about hiring more employees, building a front office, or even renting larger office spaces. It’s about implementing the right financial strategy and having access to the right financial advice.

The first stage in a SaaS company’s growth is Product Development and Beta Trials. This stage might only require funding via a line of credit for fast and accessible cash. The second stage comes when the product is actually in the market and users are encouraged to use it and share it widely. This is where MRR starts to build. The second stage is also very capital-intensive. 

Each stage requires different financial services. The later stage may require more time and energy from your CFO. Fractional CFOs are masters of scale. They offer basic services to small companies such as accounting revenue tracking and financial reporting. When your needs change, they are able to expand services and offer more strategic support. They can spend more time and energy on one project. 

At some point, a SaaS company will need a full-time CFO with staff. But the journey to this point will likely mean the use of a fractional CFO service that can scale with the needs of the company.

3 Things to Know About Fractional CFOs and SaaS

We’ve been over the relationship between SaaS and financial consulting. Now we’ll leave you with three points for SaaS start-ups to keep in mind.

• Experience Matters

In the first section, we went over the different characteristics of SaaS as opposed to other industries. We also discussed how these unique characteristics have implications for the financial realities of building a successful SaaS product. 

The right fractional CFO service should understand your company’s unique sector. At a basic level there are rules of finance and investment that transcend all economic sectors. However, your CFO team’s ability to leverage your unique position and understand your market will help you accelerate your growth.

• Scaling With You

It’s important to understand your financial team’s ability to scale. As your firm moves through the different stages of development, your financial teams should be able to meet your new needs and grow with you. Whether this is a set of varying tiers of service or differing access to time and network, it’s important that your fractional CFO can meet the needs of your company as you grow. Ideally, he/she will understand what’s coming next and position you financially to move into the next stage of growth with the proper reporting mechanism to attract investors. Sit down with your financial team and talk about growth and strategy. Make sure they have the ability to scale with you.

• Integration

SaaS is particularly well-structured for financial reporting. We’ve covered how this makes SaaS companies attractive to investors. You have to make sure that your financial team properly leverages these strengths. Discuss how revenue will be tracked, recorded and reported. 

Integration between sales and revenue is important. Investors will want to see the type of revenue you earn and signs of financial stability . Revenue reporting should be easy to understand and convenient.  Your fractional CFO will advise you on how to optimize your back-end and front-end reporting presentations to keep the most important financial information at your fingertips.

Recap

SaaS has certain unique characteristics. Chief among them are M/ARR and scalability. These characteristics have implications for how a SaaS firm positions itself financially. They also have implications for financial strategy. Understanding and leveraging these particularities is crucial for success in the SaaS field.

A fractional CFO provides financial consulting for all sizes of companies. So while your company might not have the resources to bring in a full-time CFO, it can benefit from sound financial planning during the crucial early stages. Moreover, a fractional CFO service will scale with your firm and grow with you as you progress through the various stages of growth.