Free SaaS Financial Projections Template (Excel, Google Sheets)

0:00 In this video we’re taking a look at different business models that you can 0:04 use in a SaaS startup to project and forecast your revenue going forward. 0:08 And we’ll particularly pay attention to the case where it’s a new business or 0:12 a new business line within an existing company, and you don’t have historical 0:16 data to base your estimates off of. 0:19 We’re gonna look at what are the different ways to model going forward 0:23 and what are the most common business models for SaaS companies out there. 0:28 Ready to start? 0:29 Let’s dive straight in. 0:30 Hi, my name is Dobri. 0:31 This is Minty Analyst, and today we’re taking a look at forecasting and 0:35 projecting revenue for a SaaS business. 0:38 Revenue projections are essential for any SaaS startup as they help with 0:42 decision making, provide for an effective planning, and also help with fundraising. 0:47 By having a good estimate of your future revenue, you can better plan your 0:52 sales and marketing expenses and the amount of capital you need to raise 0:57 in order to meet your revenue goals. 0:59 The biggest challenge when it comes to projecting revenue 1:02 for a SaaS business is that 1:05 the majority of SaaS startups are looking to revolutionize the way a specific 1:09 thing is handled on the business side. 1:11 So therefore, it’s hard for them to find accurate historical data that 1:15 they can use for their projections. 1:17 This Makes revenue forecasting even more important for a SaaS 1:21 company or a SaaS startup. 1:22 For example, if you overstate the percentage of visitors that you can 1:26 convert to paying customers by running a paid ad campaign, you can have serious 1:31 issues down the line because this would inform your entire P&L down the line. 1:37 So you assume that you generate an X amount of revenue, and you’ll do that 1:42 by converting an X percentage of your visitors and you need to spend an 1:47 X amount to convert those, visitors to paying customers so that you can 1:51 generate this revenue at the top line. 1:53 And the problem is that you are forecasting this amount of revenue, 1:57 being able to support this expense. 2:00 And if it turns out that your percentage assumption for the conversion was 2:04 wrong, then you have less revenue to support the exact same cost. 2:08 And this can be problematic down the line as it would throw off your entire P&L and 2:12 your entire projections going forward. 2:14 now that we know how critical accurate revenue projections are for any 2:19 SaaS startup or an established SaaS business, let’s go ahead and look 2:23 at the different business models and different ways to forecast revenue 2:27 that we can apply to make sure that we have a correct path going forward. 2:32 So let’s start by exploring the two most common ways to forecast revenue. 2:36 So you have the top-down approach and you have the bottom-up approach. 2:41 Gonna start with the top down approach. 2:42 It’s more useful in cases where we have less of an idea of what you can do, 2:47 so in this approach, we’ll start with the market size and then go down and 2:52 figure out how much we can capture. 2:55 And what our revenue might be based off of that. 2:57 For example, for our estimated market size, we have our 3:00 base for 2022 at 4.3 billion. 3:03 And we also Googled the market and found an article with multiple sources stating 3:09 that it’s expected to grow at an average of 16.6% CAGR over the next 10 years. 3:16 We can apply this CAGR for each year, estimate the market size of each year. 3:21 The next thing is how much we can capture from this market. 3:24 And this is a function of two things. 3:26 The first thing is, if this is the total market for 2023, how 3:30 much is our addressable market, our TAM, total addressable market? 3:34 Here we can estimate that our addressable market, meaning the potential 3:39 customers that we can access i s 5%. 3:42 And then we have a rather conservative estimate that we are gonna convert 1% 3:47 out of our total addressable market. 3:49 So we have 5%, 1% of that is 0.05%. 3:54 We expect this to grow over the next years. 3:57 And this is usually something that you can discuss with your sales lead, 4:00 the person that will be in charge of selling your product, or if that’s 4:05 you, you can do some research read different articles about average numbers 4:09 for SaaS businesses and specifically SaaS businesses in similar niches. 4:13 Another thing that you can do is look at your competitors and what their market 4:18 share was when they first started, what it is now, how it progressed over the years. 4:22 So this is the top down approach. 4:24 We grabed an estimate for the market size, we estimated our market share, 4:29 and that’s how we arrive at revenue. 4:31 Then using our average revenue per client that we assume that we can 4:36 get, we get down to our estimated active clients in each year. 4:41 And from here on out, now that we have the revenue, we’ll use this number 4:46 to figure out the cost associated with bringing those clients on board, 4:49 servicing them, et cetera, et cetera. 4:51 So this is the top down approach. 4:53 Now let’s look at the bottom up approach and let me know in the comments, which 4:57 one do you think yields better results? 4:59 Which one is preferred? 5:01 The bottom up approach, let’s look at it from the perspective of 5:04 the subscription business model. 5:06 This is one of the most common business models for a SaaS product. 5:09 . So the idea is that the user signs up, pays a monthly, quarterly or annual 5:15 or weekly or whatever subscription, and this is a great business model 5:19 because it allows you to estimate your annual recurring revenue, 5:23 ARR, which is, one of the most important metrics for a SaaS business. 5:28 So the bottom up approach, you can build it in various ways, based of 5:33 internal aspects of the business that you have some control over. 5:37 Here we decided to start by looking at the sales team. 5:41 How many people we’ll be employing that will be doing sales, what’s their 5:45 quota for new customers for each year? 5:47 We assume a rather conservative, 80% quota realization. 5:51 We calculate the new onboarded clients and it’s also really important to add 5:56 churn Again, you can look it up on Google. 5:59 I read in a few articles that the average churn percentage for a SaaS business 6:04 is anywhere between 20 to 40% per year. 6:08 A good idea, especially if it’s like an initial model that you are building 6:12 and you have no historical data. 6:14 It’s a good idea to go on the higher end of the bound. 6:16 So I’ll go with 35% and those are the customers that will be churning each 6:21 year, calculated as 35% of my total active clans for the previous year. 6:26 Then we’ll also introduce another aspect of the business 6:30 models for a SaaS business. 6:32 So you can have a tiered business model, which means that there are 6:35 different tiers, different prices that unlock different sets of features. 6:40 So here we have three tiers, Standard, Pro, and Business. 6:43 The way I like to present those in any model is take the active clients, split 6:48 them between the three tiers based of this estimated split that we’re expecting. 6:53 And you see here that I have a difference, and this is due to the rounding. 6:56 I like to work with round numbers, especially when it’s a number of clients. 7:00 Then we have the annual charge for the different plans, and that’s 7:05 how we calculate our revenue. 7:06 And this is a bottoms up approach because you start from something that’s 7:11 internal for the company and you build your way up to your revenue number. 7:15 From here on down, you can rely on all those assumptions to build your cost part 7:20 for the business, let’s say how much it would cost to staff this sales team, how 7:25 much it would cost to onboard each client, marketing expenses, stuff like that. 7:30 Do you have a specific onboarding process that adds more to the cost structure? 7:35 Do you have additional costs for churning clients? 7:38 All this, you need to consider in the cost side of your P&L and comparing 7:43 it to the total revenue, you can figure out if it’s a viable business. 7:46 Another, business model that, is quite popular in SaaS products 7:51 is Freemium business model. 7:52 This is when you have a free tier and then a paid version with more features 7:58 or better support or something extra on top of what you are already providing. 8:03 And the concept here is that you’ll be signing up a lot of free users 8:08 and being able to convert a portion of them to paid subscriptions. 8:11 Here we decided to start with our website visits. 8:15 We apply 2% estimate, free tier signup percentage, and this can 8:19 be different for the next year. 8:20 So let’s say as you gain domain authority, you produce more content, 8:25 and your overall offering becomes better and more enticing, you can 8:29 up this percentage going forward. 8:31 What we have here is we assume the newly signed up users for the free 8:36 version out of the website visits. 8:38 We then churn some of them that would stop using the product, 8:42 and delete their accounts. 8:43 And then we also have a 2% estimate for our conversion to the paid 8:49 subscription of our product. 8:50 That way we arrive at our total active free users. 8:53 And you see here that even though we’re just starting with the paid 8:57 subscription with our SaaS product, we might already have some free users from 9:01 our beta or from our pilot projects, et cetera, that we can start from. 9:06 So we have a starting point here, even though we don’t have anything historical 9:11 in terms of revenue and expenses. 9:12 Then we grab the converted users from the free tier to the paid plan. 9:17 We apply the same 35% churn to those, and we end up with the active paid 9:23 users, estimate the annual user fee, the revenue that we’re generating 9:27 per each user every year, and that’s how we end up with our revenue. 9:31 Then, similar to the subscription model, we’ll follow the same approach of going 9:35 through those assumptions and see how they will be reflected in our cost 9:39 structure in our P&L going down the line. 9:42 Another business model that’s quite popular is the Pay-as-you-go Business 9:46 model, where users are only paying when they’re using specific features. 9:50 So for example, here we have something similar to the Canva free model, where you 9:55 have website visits, free tier signup, free tier churn, similar to what we had. 10:00 We’re starting with 500 free users up till now, and what we’re 10:04 calculating is how many paid visuals will each user use on average. 10:09 And this is something that will be hard to forecast if you 10:13 don’t have anything historical. 10:14 I don’t think it’s a data point that’s easy to find online for your competitors. 10:19 But if there’s a way to forecast that, that’s a good way for 10:23 estimating your revenue going forward. 10:25 Then we have an average price per the visuals used, and that’s 10:29 how we arrive at our revenue. 10:31 So in this business model, the users do not pay a subscription, so we have 10:35 less churn, and we are able to get more traction more quickly, and our 10:39 revenue comes from whenever those users are using some paid visual. 10:44 We also have the perpetual license business model or the lifetime deal. 10:49 This has become really popular through, services like AppSumo, where you can 10:53 list your products, let’s say it’s a subscription based model as we have 10:58 here with the same pricing tiers and everything, but we also offer a 11:03 lifetime deal, which is in fact the perpetual license business model. 11:06 So here we’re assuming that apart from our churn clients, we have another movement 11:11 in the number of clients, and that’s clients opting for, the perpetual license. 11:15 Those are clients that instead of paying this amount per year, decide to 11:20 go for a lifetime deal, pay 5,000, and don’t have to pay a subscription again. 11:25 We reduce the active paying users by that amount, which reduces our revenue 11:30 from the pricing tiers, but we also have our lifetime deals revenue, which is the 11:36 users that opted for a perpetual license multiplied by the 5,000 lifetime deal. 11:41 So as a quick recap, we have the top-down approach and the bottom-up approach. 11:46 I don’t know what you responded in the comments below, but the top-down approach 11:50 is less desirable because it relies on external factors, and the bottom-up 11:56 approach is more grounded within the business, and we have more control over 12:01 the assumptions that we’re applying here. 12:04 Most people generally prefer the bottom-up approach, but, in specific 12:08 situations, the top-down approach is the way to go, especially when we have 12:13 little to no information about what we can actually do within the business. 12:18 And even when working with the bottom-up approach, it’s a good idea 12:22 to have the same calculation from a top-down perspective, just to make sure 12:28 that those are close to each other. 12:30 And it’s also a great reasonability check for your model. 12:33 So if you do your bottom-up approach and you get to a revenue that’s 12:38 like 15% of the total market, it probably would be quite unrealistic. 12:43 So whenever possible, when you’re working on a bottom up approach, do a top-down 12:48 calculation as well, just to make sure that everything looks reasonable. 12:52 In terms of a business model for a SaaS startup, the most common 12:56 ones are the subscription model, the freemium model, the pay as you 13:00 go model, and the lifetime deal. 13:03 As you saw here in our lifetime deal example, a lot of times we use a 13:07 few of the business models together. 13:10 For example, here in our perpetual license business model example, 13:14 we are combining the subscription model with the lifetime deal model. 13:19 Of course you can go either way. 13:20 You can just do a lifetime deal, that was very popular for software back in the day. 13:25 And, in the past two years, I’ve seen more and more SaaS companies opt for this 13:30 approach as their main, business model. 13:33 So there’s certainly somewhat of a shift in this direction. 13:37 And it’s a business model that you should consider and look into when 13:40 figuring out your SaaS product and what would be the best way to monetize it. 13:45 So those were the most common business models that SaaS companies use and 13:48 the most common ways to forecast those in Excel, especially for new 13:53 startups that are just starting and don’t have historical data that they 13:57 can do statistical analysis on top of. 13:59 Now that you have a solid foundation on how to forecast your revenue when you are 14:05 starting your new SaaS business, take a look at this video, which is gonna show 14:09 you how you can forecast your entire Income Statement going forward based 14:13 off of historical data so that you’ll be better prepared to pitch to investors 14:18 or provide information to the bank, or any other stakeholder for that matter. 14:23 Thank you, guys, for watching. 14:24 Give this video a thumbs up if you enjoyed it. 14:26 Also, don’t forget to subscribe if you’re not already, and maybe even punch 14:29 the Bell icon to receive notifications every time I upload a new video. 14:33 Till then, thanks for watching and I’ll catch you in the next one.