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Building an investor grade financial model for your SaaS startup

Creating a financial model for your startup can seem daunting — but it doesn’t have to be

One of the many reasons investors love Software-as-a-Service (SaaS) based businesses are because of the predictability and visibility it provides into the future performance of the company. A great way to showcase this to investors is through a well thought out financial model.

A well built financial model is like a well-oiled machine, the more sophisticated the machine the more it is capable of doing. When building your financial think: do I want to build a bicycle or a rocket ship. Different machines are meant to serve different purposes, cater your model to its audience and the stage your company is at.

You have to know how to build a bike before you can build a rocket ship!

But building a financial model from scratch, regardless of the stage you’re at, can be hard and time consuming. Where do you start? What should you include? Do you have enough details or is it too detailed (yes that’s a thing!)…there are so many things to consider.

The first thing you may do is Google it — here’s what happens:

Pro-tip: templates are a good starting point (although I believe you should never pay for a financial model template), your business is unique and so should your financial model — don’t just blindly use a template. Think about the implications for your business and whether something applies or not. That said there are plenty of free templates and resources you can use to get started with, but remember to tailor it for your business.

In my role at SurePath Capital Partners, I’ve seen a fair share of financial models, especially for startup SaaS companies — although there are many similarities, each model is unique.

Outlined below are some of the key components every good model should have. I’ll discuss each in detail including best practises and things to consider when building a financial model for your SaaS startup. This is not meant to serve as a foolproof method to build an investor grade model, but should serve as a guideline and considerations for best practices. (Note a good financial model will have an Income Statement, Balance Sheet and Cash Flow — in this post, I’m going to be covering the Income Statement in depth)

  1. The Sales Plan: how does your business plan to generate revenue?
  2. The Hiring Plan: who’s going to be on the team to do it and when should you hire them?
  3. The Expenses: what will it cost to keep the servers/hosting up and running, attract new customers, keep the lights on, etc.?
  4. Metrics: what is the average revenue per user (ARPU), how much are you paying to acquire them (CAC) and many other SaaSy metrics that show an investor how awesome your business actually is.
  5. Overall tips and best practises: creating a financial model isn’t a science, there isn’t one right answer — there is however some things that work and others that don’t.

The Sales Plan

This is the most fundamental part of any financial model. A good sales plan has clearly identified drivers — the key factors that increase sales. This can be hard, but it is arguably the most important part.

Think: What is the ONE thing that my business needs to drive revenue?

Pro tip: do not just hardcode a revenue number and show it growing an arbitrary percent month-over-month (MoM). This is not well thought out. An investor wants to know the components of that number, so they can see how your business grows and becomes massive.

Here are a few examples:

  • Number of visitors to your website in a month. From there a % of them may sign up for a free trial, after their trial ends, a % of them may become “Bronze” level customers, while another % of them become “Silver” level, and so on (based on your existing product/tier mix).
  • Number of sales reps. Typically, they’ll have a certain quota of deals/customers/sign-ups they are required to close in a month. Perhaps they have a number of demos they have to book every month. From there there maybe a % of those demos that are actually completed and eventually a % of completed demos start a trial, and eventually become paying customers.

The Funnel

Think about each stage of your sales funnel from a lead to a paying customer. Dissect it and assign values to how each stage converts to the next (use as much history/experience you have up to a maximum of the last 12 months).

  1. What’s at the top of the funnel? What drives it?
  2. What happens at each stage of the funnel? Each step in the funnel needs to have its own set of assumptions.


Once you’ve thought through how your sales funnel brings in new customers each month, the next step is to think about your customer count over time.

Each month, you should show the following build up of your customers:

Beginning Paying Customers (the same as the customers you ended the previous month with)

Add: New customers acquired through your sales funnel

Subtract: Customers lost through churn (inevitably some of your customers will leave, or unsubscribe, you need to account for this through a monthly churn assumption)

Ending Paying Customers (this will be the number of customers that pay you this month)

Some Considerations:

  1. If your business has multiple product tiers, you should do this for each product tier.
  2. If you charge different prices for annual billing compared to monthly billing, you should separate your customers this way as well.


Now that you’ve determined your customers in each segment (by product, annual billing, monthly billing), you’re ready to calculate the revenues generated.

Each segment of customers should have its own monthly price assumption (if you have an annual price — divide this by 12), which gets applied to the number of customers in that segment. Sum up all the segments, and you get the revenues for the month.

Pro tip: if you have different pricing for annual vs monthly billing, its a good idea to separate your monthly recurring revenue (MRR) from your cash received. Annual billing customers will pay you upfront so you have the cash on day 1 — but not all this is revenue, whereas monthly pricing you earn the revenue, as its paid. For more info on this difference, check out Tomasz Tunguz’s post.

The Hiring Plan

You’ve nailed down your sales plan, but in order to execute, you need to build out your team. For a SaaS startup, Salaries and Benefits are almost always the largest expense — spend time on it and think it through!

When building up your hiring plan, separate your team into sections — the most common ones are:

  • Sales and Marketing: these are individuals that are on your sales team, usually generating leads, closing sales, etc.
  • Customer Success: these are individuals that are nurturing relationships and keeping in touch with your customers AFTER they’ve become a customer. These individuals are key to ensure your customer doesn’t churn and if they’re successful, they’re able to upsell the customer on other products and services your company offers (potentially resulting in negative churn — the holy grail of SaaS).
  • Engineering / Product Development: self-explanatory — you need to continuously evolve your product, these people do that.
  • Admin / Management: again self-explanatory.

Pro tip: The distinction between Sales and Marketing & Customer Success is sometimes not as clear, especially in the early stage — but Sales and Marketing costs should be included in your Customer Acquisition Cost (CAC), whereas Customer Success costs are not.

The important part of the hiring plan is accommodating for growth

The key here is to ensure you have scalable hiring: think of the capacity of your current team. This is typically a step function — think of it as, “For every X customers, I need 1 new team member (for whatever the relevant function is).

  1. How many paid accounts can a Customer Success rep take on, before you need to hire another one?
  2. How many sales reps do you have until you need a Sales Manager to manage them?
  3. How many total employees do you have until you need an HR person?

Some considerations:

  • Your model should include some amount for salary increases each year (at least 3–5%; you want a well thought out model, don’t forget this!)
  • You should budget a pool for bonuses (typically a % of total salaries). You don’t need to allocate this pool individually (this is too much detail)
  • It’s important to separate commissions from salary. Commissions are a variable cost, whereas salaries are fixed — key difference.
  • As you hire, you’ll need to account for costs to get them set up (a computer, desk, chair, certain software subscriptions, etc). Think about that and include it!
  • Don’t forget about costs associated with providing benefits!

The Expenses

You’ve done all the heavy lifting now; figured out how your sales will grow, and the team you need to execute on it, but what about the other expenses.

Generally, you should avoid hard coded expenses that do not dynamically change as your revenues grow. Think hard about the relationships between certain expenses how it links with revenues and other expenses. It is rare for an expense to stay absolutely constant as your business scales and grows.

There are 3 broad types of expenses:

  1. Variable: directly correlated with something. (Example: Payment processing fees, usually 2.5% of all revenues received through credit cards online)
  2. Step Costs: Cost stays the same for a certain range, then jumps for the next range. (Example: 1 Customer Support rep can cover 100 accounts at a salary of 70K, as soon as you get 101 accounts, you need to hire the second rep. The cost becomes 140K, but covers you up to 200 accounts)
  3. Fixed: Regardless of how much you scale, the cost stays the same (try to avoid this). For a high growth startup, truly fixed costs are rare. An example of a fixed cost at a steady growth state would be Rent, but at a high growth startup, as you continue to grow and hire people, you’ll need to move into a bigger office.

Turn fixed costs into step costs.

Even if you have fixed costs for large intervals (ie. your current office can accommodate 30 people, you’re at 10 now), build in the functionality for how this cost scales when you have 40 people. A well thought out model will have accounted for this.

Below are some common expenses for SaaS startups and how to think about them:

Cost of Goods Sold (COGS)

  • These are costs that you need to incur in order to sell your products. Typically includes costs for hosting/servers, on-boarding costs for customers, customer support costs, etc.

Sales and Marketing

  • Paid acquisition. You may have customer acquisition programs through Google search, Facebook, Twitter, and other channels. What is the average cost of acquiring each additional customer? Make sure this is linked to your sales plan. Your Customer Acquisition Cost (CAC) is related to the amount of you’re going spend on marketing and then in return that will tell you how many new customers you’re likely going to add each month. Make sure this is linked — otherwise your machine is broken. No one likes broken things!
  • Salaries. Include costs for your sales and marketing personnel in this category.


  • Costs such as rent are included here (see note above on fixed costs).
  • Utilities, repairs, property insurance — treat these as a % of rent. The thinking here is that the bigger the space, the more you have to pay for rent, the more you have to pay to keep the lights on, more for insurance, etc.

Always think of how costs are related to other expenses or revenues, and how scaling impacts those costs!


There are a slew of great SaaSy metrics you can show and calculate, this provides investors the ability to see how profitable your business is for EACH incremental customer (commonly referred to as unit economics) you bring into the machine.

David Skok has an awesome post on calculating and benchmarking SaaS metrics here.

You don’t need to show all of them — show the key ones, highlight the ones that make your business great!

At the bare minimum, include these 5 from the Kiss Metrics post.

  1. Monthly Recurring Revenue
  2. Churn
  3. Customer Acquisition Costs
  4. Average Revenue Per Customer
  5. Lifetime Value

Some overall tips and best practises:

Every model is different and unique, but these are some best practises to follow for any financial model

  • Put brief descriptions throughout the model. Someone should be able to walk through the model on their own, and know exactly what your business does and how it generates revenue.
  • Have one tab with all your key assumptions. All assumptions should be in a different colour (typically blue). This allows an investor to quickly input their own assumptions and see how the rest of the business reacts to it. You may be looking to raise $5M, but if your model is well thought out, and the unit economics makes sense, an investor may be willing to invest $10M to aggressively grow. Have the flexibility so these assumptions can dynamically change each year of the forecast period.
  • Monthly is better than annually. Structure your model so you show how your business makes money each month — this helps to account for seasonality (your business may not be the same every month, some months will be better than others because of the market you serve).
  • Link stuff — wherever possible show relationships! The purpose of the model is show how efficient your business is and how everything flows together financially. What happens when I hire 10 sales reps, as opposed to your forecast 2? Not only should your revenues go up, but so should your costs — you have to pay for 10 reps now, not 2. You need to equip them with a computer, chair, desk, etc. Everything should be connected and linked. This is key to building a well thought out model!
  • Make sure your model is print friendly. As crazy as it sounds, people still print stuff (whether it be to PDF or paper), make sure your model prints properly.
  • Show how you’re going to use the capital. An investor isn’t going to fund you to see their money sitting in your bank account. Show what the money is going be used for (typically done through a Cash Flow Statement). Maybe its to hire people, maybe its to invest in sales and marketing, whatever the reason, show it!

Creating a financial model is hard work, but it isn’t rocket science. It requires time and thought — it’s not something you can rush and slap together the day an investor requests access to your data room. You need to think things through — think about things both ways. Revenues can’t just go up 100% while all your costs stay the exact same.

This isn’t meant to be a foolproof post on creating a financial model (no post will ever be foolproof — every startup is different and unique), but hopefully it serves as a guideline and gets you thinking about certain things you need to consider when building an investor grade financial model for your SaaS startup.

If you have any questions about any of the above, or are just feeling SaaS-y — hit me up on Twitter:

Thanks to Mark MacLeod on providing feedback on drafts of this post.

Shubham Datta is passionate about technology, startups, sports, and investing. He is an Associate at SurePath Capital Partners, where he helps fund, grow and exit startups. He has a B.Math from the University of Waterloo and is a CPA by training. You can find out more at

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Shubham Datta

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