To determine a SaaS company's overall health and its ability to withstand financial challenges, SaaS finance accountants rely on what's known as the Bessemer 5 C's of Cloud Finance. These metrics include Committed Monthly Recurring Revenue (CMRR), Customer Acquisition Cost Payback Period, Cash Flow, Customer Lifetime Value (CLV), and Churn and Renewal.

While these metrics seem straightforward, they can be complicated to calculate and interpret. Below, we'll break down each metric to provide a better understanding of how SaaS performance is measured.

Committed Monthly Recurring Revenue (CMRR)

For SaaS companies that sell their services on a monthly subscription basis, CMRR is an essential metric. It considers monthly recurring revenue, churn, new bookings, downgrades, and upgrades to predict future monthly revenue. This figure typically excludes one-time fees.

Customer Acquisition Cost Payback Period

Acquiring new customers is expensive, whether through advertising, direct sales, or other means. The CAC payback period measures how long it takes for a new customer acquisition to pay for itself and become profitable. Most businesses aim to break even as soon as the customer purchases something, but the payback period may be longer for subscription-based services. Typically, a payback period of 5-12 months is common.

Cash Flow

Cash flow is the amount of money coming in versus the amount going out. During an economic downturn like the one caused by Covid-19, a company's survival may depend heavily on its burn rate. A burn rate occurs when a company's expenses exceed its revenue, and the amount of reserves a company has plays a significant role in how long it can continue to lose money before shutting down.

Customer Lifetime Value (CLV)

CLV represents the total amount of profit a company can expect to generate from each customer. It considers the length of time a customer typically remains subscribed, rather than assuming all customers will remain for an indefinite period. Various methods can be used to determine CLV accurately.

Churn and Renewal

While permanent customers would be ideal, subscribers inevitably cancel their subscriptions. Finance companies want to know how many subscribers are leaving compared to the number of new ones, as dwindling subscribers can be detrimental to a company's success.

Key Financial Statements

In addition to the Bessemer 5 C's, SaaS companies must also provide certain key financial statements to prospective lenders.

The Balance Sheet

The balance sheet offers a snapshot of a company's digital assets, subscribers, and financial positives, as well as its liabilities and equity. It typically includes the company's expenses over the last year or another specified time period and forecasts future activities, such as changes in subscriber numbers, expected revenue per user, and churn rate.

Sensitivity Analysis

This document delves further into future-looking scenarios based on specific variables and is sometimes referred to as a "what-if" analysis.

Discounted Cash Flow Valuation

This calculation factors in all expected future cash flow against the time value of money. For SaaS companies, arriving at this figure is relatively simple due to the use of the subscription model.

Other Considerations

To ensure accurate measurements of SaaS performance, companies must pay attention to expected growth factors, milestones, and the types of teams needed to achieve objectives. Additionally, it's crucial to work with a lender who understands the unique nature of SaaS and cloud-based services, as traditional lenders may struggle to understand these business models.

In conclusion, measuring SaaS performance is crucial for determining the health of a company and its ability to