Embrace Data-Driven Growth: The Power of Bottom-Up Financial Planning for B2B SaaS Start-Ups
We often receive financial plans, which follow a top-down approach. Let’s talk about why this might not be the best way to go about it and why we encourage founders in our portfolio to opt for a bottom-up financial plan right from the start.
Top-down financial models, while common, often lack the depth and specificity required for effective decision-making. Whether based on expected growth rates, revenue targets, or market share projections, these models often fall short in capturing the nuanced dynamics of individual companies and their GTM motion.
Therefore, they typically rely on wishful thinking 🙏 rather than the unique growth drivers that your company can actually influence.
Top-down plans usually showcase a fixed 3x revenue growth per year, mirroring the expectations of early-stage investors. However, during our Due Diligence process, we focus much more on understanding the fundamental aspects of your business than fixating on the exact figures in your financial plan. We view the financial plan as a starting point for deeper discussions about your strategy, focusing on key revenue and cost drivers.
The integration of these drivers not only enhances our comprehension of your business but, more importantly, equips you to manage your company in a data-driven way. So instead of only serving as a document tailored for investors, it should be viewed as a powerful tool for your operations.
And yes, this also holds true for early-stage companies. In this case you may not yet have sufficient firsthand experience or verified data for all your drivers. However, drawing from your initial experiences, B2B SaaS benchmarks, and your network, you can formulate “initial best guess” assumptions for each driver. This exercise not only helps in distinguishing what you know from what you don’t but also sets the stage for continuous measurement, learning, and refinement of your financial model over time.
👉 If you believe that implementing a bottom-up financial plan could benefit your B2B SaaS company but you are unsure where to begin, here are some tips to help you get started:
1. Identify your key drivers: Ultimately, a good model revolves around a price-quantity framework. While price is typically straightforward, the fundamental drivers of quantity (i.e. how many software subscriptions do you sell) may not be as apparent.
- One approach to calculate the expected number of new customers is to multiply the Lead Quota per Sales Rep per month with the conversion rates along your sales funnel (+ accounting for stage duration).
Check our latest Senovo Financial Model for more details.
2. Acknowledge your status quo: What information do you have? What areas are still unclear?
- For each of the drivers identified, which learnings have you made so far?
- What additional data points are needed to generate more learnings on an ongoing basis?
- Which tools are necessary to collect and analyze this data effectively?
- Who within your team is responsible for tracking this data?
3. Setup a flexible bottom-up financial model: Start with your key revenue and cost drivers as variable input factors in your model. Revenues, monthly growth rates, cashflow, etc. are all calculated outputs.
- If you want to start on the back of a template, explore our latest Senovo Financial Model designed specifically for B2B SaaS companies.
4. Set realistic assumptions and cross-check them against your sales teams’ quota: Use your historical data as a foundation and supplement it with additional B2B SaaS benchmarks if necessary. To reinforce the viability of your plan, compare it against the sales quotas of your reps. In line with market averages, I would recommend to assume a 80% quota attainment rate.
- Example: Your bottom-up model, which is based on your lead quota per sales rep and conversion rates, results in 2m EUR new ARR next year.
You have 2 sales reps with 800k EUR quota each.
Let’s cross-check if this is realistic:
→ 2 sales reps*800k EUR quota*80% attainment = 1,28m EUR new ARR.
→ Next years’ new ARR seems to be short by 720k EUR. Either your sales KPIs are exceptionally (if so, let’s connect 🤑), or you’ve relied on overly optimistic assumptions and may be understaffed in your sales team.
Considering ramp time and sales cycles, it seems that you should hire 2 more reps as soon as possible. — An insight you might not have with a top-down approach.
5. Assess the sensitivity of your key drivers: Not happy with the ARR at the end of next year or the resulting runway? Conduct a sensitivity analysis. Ask yourself: Which drivers have the most significant influence? Which ones are within your control to modify? How can you influence them proactively?
- Example: You’re building a financial model for your next fundraising round. Taking into account sales cycles and the time it takes for new sales reps to reach full productivity, it may become evident that the true effects of hiring a new sales rep are not fully realized until after 12-month. Speed of hiring is an obvious driver, which you can influence. To demonstrate sufficient sales success within 18–24 months, the model shows that you should hire the sales team relatively quick after securing funding.
6. Engage your team: Collectively evaluate the drivers and objectives outlined in your financial plan. Ensure that everyone, from marketing to tech, understands the metrics being tracked and the rationale behind optimizing specific KPIs. This fosters alignment within the team, ensuring that everyone is striving towards a shared objective. 🤝
7. Continuously measure and adapt your assumptions: Regularly monitor your key drivers and refine your model as needed.
- Example: If you observe that your sales cycle has extended from 4 to 8 months, it will influence your runway and requires adjustments in cash management and fundraising planning. Once you set up the model in the right way, you’ll be able to quickly see the impact by adjusting certain assumptions and how they, for example, affect your runway.
8. Regularly reassess: Consistently scrutinize your financial model and the pivotal drivers of your business. Treat your financial model as a dynamic document which requires adaptation in response to evolving business needs.
9. Leverage your network: Ask for feedback and guidance from the people around you. Also, don’t hesitate to reach out to me or one of my colleagues at Senovo. We love to talk with B2B SaaS founders, discuss your financial plans and KPIs.
I hope you found this helpful and let’s implement a more data-driven, bottom-up approach to financial planning in B2B SaaS companies. 🚀
Got any thoughts or questions?
Looking forward to hearing from you: mona@senovo.vc
