Metrics are vital for tracking the performance of SaaS companies, and a well-structured Profit and Loss (P&L) statement is critical for measuring financial success. SaaS companies have unique business models that require specific metrics to be tracked, such as Monthly Recurring Revenue (MRR), Customer Acquisition Cost (CAC), and Customer Lifetime Value (CLV). These metrics are revenue or/and OPEX driven. Some of the inputs needed for those metrics come from the P&L. A P&L should help to identify areas of strength and weakness, providing valuable insights that help strategic planning. See my latest post on the most important metric for SaaS companies here.
In this post, we delve into the various aspects of SaaS company P&L, the difference between their P&Ls and other types of P&L, including what the right structure looks like.
We will also cover why a correct P&L set structure can help guide or aid strategic decisions. Most importantly, what does a strong P&L structure look like and cover two of many major strategic decisions they can help drive.
What is P&L?
A Profit and Loss (P&L) or income statement is a financial statement that shows the revenue, costs, and expenses of a business over a specific period. It summarises the company's financial performance by providing information on the revenue generated and the expenses incurred during that period.
The fundamentals of a P&L include:
Revenue: This is the total amount of sales generated by the company from the sale of goods or services (for SaaS companies).
Cost of Goods Sold (COGS): COGS is the cost of producing or purchasing the products or services sold during the period. It includes the direct costs associated with producing or acquiring the goods or services, such as partners margin, support, raw materials (for manufacturers)
Gross Profit: This represents the difference between revenue and COGS. It shows the amount of money left over after deducting the cost of goods sold.
Operating Expenses (OPEX): These are the expenses incurred by the business in the course of carrying out its operations. They include costs such as rent, utilities, salaries and wages, marketing expenses, sales expenses, and other overhead costs.
Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA): Net income, popularly known as EBITDA is the difference between gross profit and operating expenses, before deducting iterate on loans, tax on earnings, depreciation/amortisation of tangible and intangible assets respectively.
Standard P&L
A standard P&L will have all the fundamentals listed above as expected. However, such a setup is not a true reflection of the operations of the business. The purpose of a strong P&L is to show the true nature of a company’s operations. By reviewing a P&L, one should be able to understand the internal operations of a company. Pic 1 shows an example of an ordinary P&L. It specifies revenue split, cost of sales, and all the operating expenses are lumped together. While this might suffice at an early stage, it does not add much value. Certainly, it is a challenge to use such a setup to drive OPEX-driven SaaS metrics.
SaaS-structure P&L
Pic 2 below shows what a well-structured saas P&L should show. At the early stage when I join a company, in addition to other priorities, restructuring the P&L will be included. Why? A SaaS company should have a P&L that reflects its operations, from revenue to operating expenses. It means when reviewing the income statement at month end, one must be able to see a detailed and summarised version of OPEX by teams. A version of the same P&L should have a detailed breakdown of the OPEX by team: sales, marketing, product development, general, and administration should be a bucket. The second version should have a summary of each functional area. The financial model and/or budget should follow the same format. It makes it easier to complete variance analysis at month and re-forecast where necessary.
Major users
The summarised version might be useful for your investors, depending on their request. Both summarised/detailed, by functions should be shared with each Head of Department or Directors for review at month end. P&L should be part of the conversation during the monthly Senior Management meetings. Gone are the days when finance teams were the main users of income statements. Your CTO should understand the cost of each team in R&D, the same with sales and marketing. Using the P&L, the CTO should understand which product is profitable. This can also help the team to decide the most efficient way of deploying the resources.
The sales and marketing team should understand the cost of acquisition (CAC) content, how that is driven, and which new business or expansion was a result of the CAC investment. When taking on a new project or assignment, in addition to other priorities, adjusting the P&L structure is usually on top of my list.
Strategy
Companies have cocktails of strategies at different phases of their growth. Pic 3 above is of a company with a product-led strategy. The heavy investment in R&D reflects that strategy well. For stakeholders, it is important to show the EBIDTA with total R&D and Adjusted EBITDA that shows the state of the company if new product investment is not being pursued. At some stage in its growth, the product investment will start to reduce because those products will only need maintenance. To accelerate growth, that would be the right stage to switch to a growth-led- strategy via investment in sales and marketing. It is important to get the balance right between both strategies so as not to ignore one or the other.
In summary, a well-structured P&L will help drive accurate saas metrics and provide a clear structure of the company's operations. With a clear structure, the business has a better chance of achieving its potential and implementing its strategy. SaaS P&L is a must.
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