- If you wanna actually grow your SaaS business,
one of the most powerful tools
that you have at your disposal is your financial model.
Now, don't get me wrong.
No one really gets excited about staring
at a complicated spreadsheet, a financial model at that
and looking at all those numbers.
But when I started to work with a really great CFO,
when I started to really see what they do
and how they do it and what a really great financial model
looks like, it completely changed the game for me.
And the way I approached strategic planning,
the way I approached driving growth,
the way I thought about trade offs
around how to spend our money, it just completely changed
the trajectory of our SaaS business.
So in this episode, I'm gonna actually walk you
through the three principles that I learned
when creating a really great financial model.
Intro.
(upbeat music)
What's up everybody.
Welcome to Unstoppable.
I'm TK and on this channel, I help SaaS founders
like you grow your SaaS businesses faster
with an unstoppable strategy.
If you are new to this channel, welcome.
Be sure to hit the subscribe button and that bell icon.
I drop an episode three times a week
and actionable strategies
on how to grow your SaaS business.
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you'll get notified every single time I drop an episode
with TK energy.
Now if you're already part of our community,
our really fast-growing community at this point,
if you're part
of my SaaS Go-To Market coaching program, welcome back.
It's seriously awesome to see you over here.
Okay, so I have ADHD.
I just, I recently found this out actually.
But it's highly, I'm highly functioning
because I didn't know about it
and I thought that was kind of weird
and so I created all these systems in my life
to compensate for it.
And it actually became a superpower.
That's for other episode.
But the idea of staring at a financial model
and all those numbers and in that spreadsheet
with the multiple tabs and everything's connected
and there's like the blue text, it just horrified me.
I hated it.
And also, in the early stages to be honest,
the idea of a financial model
also felt a little disingenuous.
I'm like, how can we possibly predict what we're gonna do
three years out?
It's so early.
We don't even know where product market fit yet
or we don't even know if this is really gonna scale
or the TAM is gonna hold up.
You just don't know.
And the whole, I just hated it.
But, then I started working with a great CFO
and when I started to see
what a really great financial model looks like.
And when I started to actually bring in a BizOps person,
I've talked about Leo before.
And he really took control of that model
and really made it operational.
When I really started to see the power in it
and how it became so powerful
and giving me insight into the business
and the different levers I have in the decisions I can make
and how we can drive strategic growth,
when I started to see that, everything changed.
And there's a million YouTube videos
on how to create a financial model that like opens up
a spreadsheet and kind of walks you through,
this is not that kind of video.
I want you to zoom out and I'm gonna teach you
the three principles that you need to know
around building a sound financial model
and how that's gonna fit into helping you actually build
a strategic plan for growth in 2021 and beyond.
So, if you're excited to get into the three principles,
go and smash that like button.
And let's actually dig into this.
Okay, so principle number one when you're building
out your financial model,
like when you get into the weeds of a financial model,
it can be overwhelming
and you can kind of lose the actual reasons for this.
And these three principles are gonna explain
what actually matters.
What really matters in the financial model,
so that you can use it to create your strategic plan.
So, principle number one is to think about your fixed costs.
This is the most important part
and probably the easiest part about your financial model.
The reason fixed costs are important
is they're the most effective way for you to manage
your burn and your runway.
Now, fixed costs are the things you spend the same amount
every month, no matter what.
These are the people that you have in the business, right?
Unless you actively hire a million people,
it's gonna be a fixed cost.
You know exactly how much you're gonna pay them.
They are your facilities, the office that you get.
They're also, what is this word that I put in?
I can't even read it anymore.
Oh, contracts.
They're the software that you buy.
The software that you committed to paying for.
There are other contracts that you say like,
"Yep, we will pay for this."
These are all of your fixed costs.
And this is the first thing to really get alignment on.
I'll be honest.
Once we really focused on the fixed cost section,
we just put it all down, we knew how much we raised.
We knew how much money we had in the bank.
We knew how many people we had.
How many people we planned on hiring,
there's some variables there.
But over the next few quarters, it was like,
boom, here's your fixed cost.
And I'm like, "Okay, got it."
So, if we don't earn any money based on the money we raise,
here's why we ran out of cash.
And this is like what it takes to run this operation.
Got it.
It's cathartic, it's super powerful
because it kind of establishes a baseline.
It also a stress test on whether you're taking on too much.
Should you get that office?
Should you get rid of that office?
And now this is a weird time, no one needs offices, right?
Do you need that one year contract to pay
for that expensive Salesforce installation?
Or will a monthly thing with HubSpot should be just fine?
These are some real things.
Do you really need to make that additional hire?
Can you, do you need to keep all the people?
These are some things that you can actually think about.
They'll help you start to think about how to manage
for burn and actually manage your runway.
What is your cash out date, for example.
That's an important thing also.
So your, all of these things become 10 times easier
instead of you worrying about it, it's just there
in black and white.
Sometimes in blue, depending on how your structure
is set up.
So, fixed costs.
Getting that nailed is your first one.
Now, you can go download a template, you can go hire a CFO.
And we're actually gonna, my favorite CFO in the Valley,
we're gonna have him on the channel later on.
So be sure to hit the subscribe button and the bell icon
so that you get notified when we drop that episode.
But you wanna make sure that you nail your fixed costs.
That's the first thing you really wanna do.
Even if it's in a simple spreadsheet or using a template
or you're working with a sophisticated financial model
or with a CFO.
Once you do that, the second principle is to figure out
your variable costs.
Your variable costs include hosting, right?
So if you're setting a B2B SaaS product,
which likely you are if you're watching this channel
and watching this video,
then how much are you gonna be spending on hosting?
This is gonna change over time
as you bring on more customers, right?
What is your cost of goods?
Sometimes, support, is under cost of goods, right?
Because they're working to provide this service
and they have to support it.
So, how many support people are you gonna have?
Like map that out.
So, these are things that as you bring on more customers,
your costs are gonna go increase.
Now, great SaaS businesses, B2B SaaS businesses
are like 90% margins.
So your variable costs at least to support the product,
should not be that great.
However, great SaaS businesses have really expensive,
this is one thing that's always expensive.
It just is.
Sales and marketing.
In sales and marketing,
how much you spend to acquire a customer,
to sell a customer is under your variable cost.
And this is where the magic really happens.
Now, let me just pause here for a second.
If you're starting to see how getting your fixed costs
all laid out, your variable costs all mapped out
and starting to form an idea
on, "All right, here's how much we think
"that we're gonna spend with each additional customer.
Here's how we're gonna land those customers."
If you're starting to see the power in laying this out,
can I just get
a, yes, in the comments below.
Because this is half the battle.
Because I think like we tend to get intimidated
with a financial model and all these numbers, it's just.
But if you just embrace on these two principles,
like what are my fixed costs?
What are my variable costs like as I add more customers?
Then you start to get a handle on the business.
You start to understand,
all right, these are the different levers that exist.
And if you're starting to see the power on this,
be sure to also smash
that like button for the YouTube algorithm.
It also just means a lot to me
and my team.
And why am I talking about financial models right now?
The reason I'm talking about it is likely you're thinking
about how to create your strategic plan for 2021.
2021, you need your strategic plan.
Your strategic plan is gonna include
how much you're gonna grow,
what your revenue targets gonna be.
Where do you spend more money?
Do you need to fundraise?
All these things.
And they're gonna turn into real objectives for your team.
You're gonna align a leadership team.
If you're super early,
it's gonna be you and your co-founder,
You still need a strategic plan.
And a financial model is super important
when you're building a strategic plan.
Because here's the thing, you can get together and say,
"We're gonna do all these things."
And everyone's gonna be like,
"Rah-rah, yes, we're so pumped.
We're gonna take over the world."
Unless you have a financial plan to stress test
your strategic plan, they go hand in hand.
And a financial plan validates whether your strategic plan
is for real or not.
Do you have the money for it or not?
Whether the numbers make sense or not.
Let's just say we're gonna do $10 million
of bookings this year.
Well, if you wanted $10 million of bookings,
then you need at least three to four X pipeline coverage.
If you want a three to four X pipeline coverage,
that means you need to have $50 million,
like $40 million of pipeline.
If you wanna generate $40 million worth of pipeline
and your average deal size is 100K,
that's a whole lot of deals.
And if each new lead costs a certain amount,
then that's a whole lot of leads.
You have to generate a lot of money
you need to generate those leads.
Are you starting to get this?
Are you starting to get how a financial model
will stress test your strategic plan?
So anyway, this doesn't have to be complicated.
I've already made the first two principles simple for you.
But if you wanna create a strategic plan,
I'm actually hosting a Strategic Planning Workshop.
Inside of it, I'll guide you through it step by step.
I'll actually be bringing in my favorite part-time CFO
to actually give you advice on how to marry a strategic plan
to your financial plan.
I'll also be teaching you how to take your strategic plan
and mobilize it with OKRs.
It's gonna be step by step.
It's gonna be awesome.
If you wanna join,
you can go to tkkader.com/workshop
I'll give you more details about it in the end.
Let's go to principle number three.
Also smash that like button, if you haven't already.
It just means the world to us.
We like hearing from you.
Principle number three is your go-to-market spend.
This is where you're gonna spend the most time
in your financial model.
And it's also gonna be the most time you're gonna spend
in your strategic planning, honestly.
Your go-to-market spend, there's a real math to this
and the financial model really highlights it.
Now, there are a few things that go into this.
So, there's three big buckets.
There's a lead or a user that you get, right?
And there's a cost to that.
How much are you, how many leads and users are you getting?
And what is the cost of that?
That goes in your financial plan.
Then there's the how do you actually convert them
from a lead or a user to an actual paying customer?
Now if you are self-service business,
then you have a product funnel, a product-led growth funnel.
But there's still some cost to that if you are inside sales
or enterprise sales-driven business,
then you have actual sales people
and there's commission involved.
Now from there, then you actually convert them to revenue.
But then this revenue may come on a monthly basis,
but you spent a bunch of money up front
to do these two things and so now it takes a while
for you to earn back that money.
And that may delay how much money you have in the bank.
Are you starting to see this?
There's some nuances in this
and there's some pitfalls in this.
I remember one time, ToutApp's bank account
went completely empty.
This was super early.
And it's almost embarrassing to admit this.
It was super empty and I had to call somebody to invest.
I'm like, "We're out of money,
even though we're not out of money."
And they're like, "What are you talking about?"
I'm like, "Well, we closed a whole bunch of deals
"and they're on a 30-day, they're on a 30-day thing.
"They're gonna pay us and the check's in the mail.
"So, there's a DSO.
"And so the money is on its way, but we don't have any money
"to make payroll.
So, we need money."
And he was like, "What?"
And I'm like, "I don't, like I'm sorry."
This is why I had the,
this is when we had the not so great CFO.
And I'm like, "I'm sorry,
like I don't know what to tell you."
And they were like, "Okay, but are you sure?"
I'm like, "Yeah, I could send you the contracts."
So, there's nuances to this.
And when you have a sound financial model,
it helps you actually track all of this and understand this.
But here's where it really ties together
between the financial model and the strategic plan.
Like, let's just take a look at this for a second.
Let's and go back to the math we talked about.
Let's just say you wanna close a $1 million of business
and only 20% of leads that sign up converts to revenue.
So, that means that you gotta actually generate
way more leads and out of that 20% of them
will actually convert to real revenue,
which and if there's a certain cost of these leads,
you can start to understand in order to hit
my revenue target, I actually need to spend
a certain amount of money on generating leads.
Way more leads than they're actually gonna close.
And hopefully by the time I pay the commission
and by the way, there's a variable there,
the number of salespeople I have and there's a ramp time
on these salespeople,
I'll actually be able to make that money.
Are you starting to see where your strategic plan
needs to marry your financial model?
And when you have a financial model,
you can actually answer some of these complicated questions.
That's the power of it.
So, these are the three most important principles to address
when you're creating your financial model.
What I didn't wanna do was another video
where I walk you through a template.
There's plenty of that on YouTube.
That's not what this is about.
But when you do that you kind of get lost in the weeds
and forget the forest.
I wanted to show you the forest.
To the forest for your financial model.
Number one, get your fixed costs under control
and actually flushed out.
Just make sure like, are you committing to too much?
Like do you really need that extra headcount?
Do you need all the people that you have?
Are you better of extending the runway
so you can spend more money on marketing, right?
That's one thing.
The second is figure out your variable costs.
As you add more customers, how do those costs go up?
How do you manage that?
And most importantly,
number three, figure out your go-to-market spend
and how it aligns to your strategic growth ambitions.
You may have tremendous ambitions
but you may not have enough runway.
This also when you have the sound financial model,
it will also inform how much you need to raise
on your next fundraise.
If you wanna grow a certain amount,
here's how much money you need to raise.
And you can actually talk about that with conviction
versus just saying, "Well, we wanna raise 20-ish."
Like you'll be able to back it up
and your conviction level will go up.
And that's super powerful.
So, those are my three principles.
Number one, fixed costs first.
Number two, variable costs.
Number three GTM spend.
Now, if you are building out a financial model,
likely what is also happening is you're trying to figure out
your strategic plan.
How are you gonna grow?
What are the big levers?
What are some chokepoints and flywheels in your business?
How do you actually establish OKRs
so that everyone's aligned and actually executing
a strategic plan?
How do you make sure you actually dominate
in the next 12 months?
This is why I'm running a Strategic Planning Workshop.
In the Strategic Planning Workshop,
I'll guide you step by step on creating your strategic plan
for growth for 2021 and beyond.
So, if you're interested in that and you wanna work with us
and you wanna join us and create a strategic plan
with you and your leadership team, you're all invited.
There's a small fee to join.
Get details.
We do have early bird pricing right now,
so go tkkader.com/workshop
It will give you all of the details.
If you got value from this video,
be sure to smash that like button.
If you got value from this video,
be sure to smash that like button
for the YouTube algorithm
and for us, we just love hearing from you.
Comment below with a, yes.
We wanna hear from you.
It just means the world to us.
It makes my day when I hear from you guys.
If you have a friend, fellow founder
or fellow leadership team member,
please share this video with them.
And remember, everyone needs a strategy for their life
and their business.
But when you are with us, yours is gonna be unstoppable.
I'm TK and I'll see you in the next episode.
(upbeat music)