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hey everyone Eric here in this video I'm going to teach you about the seven most important SAS metrics that you can use as a framework to track the financial performance of your SAS startup we'll walk through every single metric what it means how to calculate it and at the end of this video I'll show you how to write an investor update using all of this data okay let's get started okay so the structure of today's video is that we're going to walk through the seven most important SAS metrics these should be tracking if you're running a SAS startup a lot of Founders have asked me sort of how do I set up a comprehensive Financial framework so that I can understand the performance of my SAS business and make sure that everything's going well so this is sort of a road map for people to run their own SAS startups internally and also to be able to articulate the performance of the business externally to investors or if you're doing fundraising so here are the seven things that we should track it's number one mrr and ARR number two growth rate I'll talk about a couple different ways you can report growth rate numbers then mrr Dynamics so there's new Revenue churn Revenue expansion and contraction so you need to be able to tell the story of the composition of your Revenue changes then of course you have customer lifetime value how to calculate that your customer acquisition cost so your CAC and then LTV to CAC ratio finally your burn and your Runway so how much money do you have until you run out of cash and then financials a lot of early stage businesses don't necessarily have very robust financials but you do need to report some information about your financials versus your historical performance or your budget so I'll show you how you can start thinking about that and then at the end of the video we are going to take all of these metrics and summarize them into an investor update you could send out at the end of the month to your investors okay let's get started so first off mrr and ARR so mrr stands for monthly recurring revenue and ARR stands for annual recurring Revenue so you should be tracking these numbers weekly monthly definitely annually as frequently as possible this is really sort of the lifeblood of a SAS business so what is included in recurring Revenue so recurring revenue is any subscription based Revenue what is not included is any one-time Revenue like implementation some kind of Consulting Etc do not report that in your recurring Revenue so if this is your Revenue you'd have a basically a breakdown between your occurring revenue and your one-time Revenue and so your total revenue would be sixty seven thousand your monthly recurring Revenue would be 52 000 and then your ARR is your monthly recurring Revenue times twelve so that's 631 so what that means is basically if you did this prior month which is April 2024 for 12 months in a row how much am how much recurring Revenue would you have on an annualized basis so if you just did this month for 12 months without it increasing or decreasing you'd be doing about six hundred and thirty one thousand dollars a year of recurring revenue and so it just gives you sort of a run rate metric and so that's what ARR is so let's write the first couple bullet points in our investor update so that it's basically already written by the time we get to the end of the video so very simple um current mrr we would just say fifty two thousand six twenty nine error um is uh 6 31 524 and then we can say April total revenue was actually sixty seven thousand 007 but that includes implementation fees so remember your ARR does not include one-time Revenue so if you just take your total revenue multiply it by 12 . that is not your ARR and investors will look into this your AR is not 800k 631 investors will look into this and diligence and then we'll find out if you miscalculated it so you want to make sure you do that correctly okay so now let's move on to growth rate so there's a couple different ways you can think about your growth and report your growth and especially if your business is growing very quickly you need to think about how you can really represent the story in an accurate way so growth you should obviously look at this monthly annually and in the very early days weekly if possible so first you have month over month you have year over year and you have compounded monthly growth rate so let's start with month over month it's month over month um you're just going to want to use your recurring revenue for your growth rate numbers that's the number that investors really really care about and so we're saying that these numbers are going back historically and we are in April 2024 and then you know we can just say that these are a projection after that so you can see that our month-over-month growth rate was in the 40s and then it slowed down as our number got bigger and bigger and in April 2024 we had a 22 month over month growth rate so very strong month now we can also talk about year over year so you can't measure year over year until you actually have a year of data so January would be the first month where we can actually look back a year and so year-over-year growth rate is 1400 percent which again I mean that's good but the denominator is so small that doesn't give you a great sense of really what's going on um here in April the 610 growth rate is based on last year's 7409 so that's a little more I think interesting so it shows we we've done a 6X year over year now my favorite growth metric is something called compounded monthly growth rate this provides you an average rate of compounding over a period of time and so um let me show you how to do this and we can talk about kind of what it means okay so we're going to go to July and so we're looking at the six month period one two three four five six between July and January so what we're going to do is we'll take July we'll divide it by January and then we will raise it to the power of 1 divided by 6. and we will subtract one so this means that if we started with this number in January this number compounded at an average monthly growth rate of 31 percent to get to the 12 000 number in July and I can prove that to you here by showing you what happens if we take January and we compound it at 31 percent pounded at 31 percent so if we just compound this number at 31 percent all the way out to July you'll see that we get to this 12 110. so on average we're compounding at 31 percent and so if we copy this formula forward you'll get a sort of average monthly growth rate over time and you'll see that by April our cmgr for a six-month trailing period is 15 percent now you can also do cmgr for a 12-month period And so it's the same formula but just with a 1 divided by 12. so you look at a 12-month period and you raise it to the power of one divided by 12. minus one and you can see that on average over that 12 month period our revenue is compounding on an average monthly growth rate of 25 percent and then later on it gets lower and lower so we're really looking at April so I think from a CR cmgr standpoint the 12-month cmgr kind of gives you a good view on older businesses five ten plus years old but for a really early stage business probably the six month cmgr gives you a better read on the growth 22 growth is good but this 15 Smooths out all of this volatility also the 6X year over year that is helpful in terms of a backward looking metric but I don't know that it really tells us what's going to happen going forward and so I think the 15 gives us kind of the best read on the overall status of our businesses growth so what can we say here about the business growth I think we can say that um you know recurring revenue is up 22 month over a month 610 year over year and has compounded monthly at 16 what is it 15 percent cmgr over the last six months you know that kind of encapsulates all all of the growth metrics um in in one bullet point that investors can can read quickly I just want to take a pause really quick first off if you're finding this content valuable please subscribe to my Channel right now and like this video one other thing I want to let you know that registration is going to be opening soon for my training program Finance for startups if you don't already know Finance for startups is a training bootcamp I designed to teach you everything I know about startups it includes 20 hours of lectures five hours of live case studies and open q a sessions lifetime access to our community that recently surpassed 200 people and I'm adding new things to it all the time if you're interested join the waitlist in the description below for a chance to join Finance for startups so now let's look at the next thing so now let's talk about our mrr Dynamics so there's really four categories of of mrr there's new Revenue that you brought on there's churned Revenue which is basically cancellation of accounts there's expansion which is upgrades of accounts so that's increasing the number of seats increasing the number of usage so paying more to basically keep using the software and there's contraction which is basically people downgrading but not churning so you need to basically talk about the changes in our your mrr by breaking it into these four categories so you and investors can really see what's going on okay so you should track all of these numbers sort of on a monthly basis um and and weekly if you're if you're really early stage so first let's talk about the churn rate so we're saying that in March um we had one cancellation and we brought on two new accounts and by the end of the month our total active accounts were 33. we're saying that the churn rate was 3.1 percent so that's one cancellation and then the total active Accounts at the end of February was 32 so the one divided by the 32 is the 3.1 percent churn rate now in April you can see that we had one cancellation we earned three new accounts and so our churn rate is the one cancellation divided by the prior month total not the current month total because the prior month is really the group of customers that were eligible to churn so three percent churn rate okay now we have uh the rest of the categories so we have our mrr from up above monthly recurring Revenue so one thing that's good to look at is your net new mrr so how much new mrr did you bring in month over month so I'm going to take the February number so in February sorry in March we brought on 2800 of net new ARR in April we brought on 9490 of net new mrr now for me um this number is a little bit hard to conceptualize so I like to actually look at the metric as net new ARR so you just take this number and you multiply it by 12. and so this is how much annual recurring Revenue you brought on to the business so if we brought on 9500 in mrr really we expect that we brought on four 114 000 of annualized Revenue to our business and so that gives you a better sense of wow you know April actually was a really big month it it really contributed to the the overall performance of the business now here you can see expansion mrr so we're saying that these are upgrades so these are people that you know are purchasing more seats etc for April and so April a lot of expansion Revenue 5500 you know overall Revenue increase was um 9 500 and more than 50 percent of it came from expansion so that is really really positive and then contraction you have downgrades so these are people that are downgrading their accounts and then complete cancellations so we lost 800 of mrr in March 950 in April and then the new business mrr so this is just basically how much of that revenue of that 9 500 um came from brand new customers and so basically 5200 of it was from new customers 5500 of it was from upgrades and then we lost 1200 from contraction and so you can see that adds up to 94.90 and so that's kind of the breakdown of what happened with our mrr you can just copy this formula over here and then to really compare it side by side there's a nice chart that a lot of people like to make so here's what the chart sort of shows you so you have your new mrr and so this is mrr from basically you know new business brand new account you have your upgrades downgrades churn and then your overall change so that's your sort of net new mrr and so a lot of businesses will show this but over many many months they'll have it going back like 18 months but they'll show it on a chart that looks kind of something like this um I'm just going to do this in a basic way just so you kind of have a sense of what the chart generally looks like so let's see clustered column cluster column yeah it usually looks something like this and so you'd see like um mrr breakdown and what this would show you is the line here is sort of your overall mrr so your new mrr was two thousand uh 800 and then it was about 9500 and then you can see these are all the things uh here on the positive side your upgrades and your new business that increase your mrr and Below you can see the downgrades in the churn these are the things that decrease your mrr so it's good over time and you can see this kind of big chart with this line overlaid over on the top of it that shows the overall change and that's a nice way to summarize your mrr performance okay so investor update so overall I would say very strong month and I'm onboarded three new large accounts you can see we onboarded you know over 5000 Revenue so those are larger accounts drove significant um if it can't expansion Revenue and onboarded 113 885 of net new ARR so that's a nice metric right there okay what else we tripled expansion mrr month over month so pretty much tripled it you can see here you know is up 2.6 x so we tripled expansion um mrr month over month um closing over 5K in upgrades for April and then contraction uh let's say um contraction mrr downgrades were low at a mere 296 verse 335 for March and then we did have we we did have One account cancellation was a smaller account you can see we only lost 950 dollars driving 950 insurance mrr at a three percent churn rate so that should give investors a very good sense of sort of where we're at with mrr okay so now let's talk about customer lifetime value so how often should you track customer lifetime value monthly is probably best um but you know don't don't wait around the Times where you should track it more often than monthly are situations where your churn rate goes up really really fast or your aov goes down really fast so you want to know if your LTV is getting worse that how much you can continue to spend on marketing so here's how you track the customer lifetime value so we have our churn rate so the customer lifetime value represents the total gross profit you make from One customer over their entire relationship with your cup with your company and so you need to figure out how many months they're going to be a customer how much they're going to spend per month how much how profitable is that Revenue stream and then how much is all of that gross profit added up so let's look at this so first off three percent churn rate 3.1 percent churn rate basically how you figure out what the customer lifetime is is you take one divided by the churn rate it's a mathematical shortcut and it'll tell you that the average customer who turns that 3.1 percent a month is going to have a 32 month lifetime and then in April we're saying that the churn rate went down slightly so the average customer um in this cohort is going to have a 33 percent customer lifetime so the aov per month well we know what customers are spending because we have our mrr divided by total customers and so we're saying in April our aov is going up driven by that expansion Revenue then your lifetime revenue is total months times Revenue per month so 49k versus 41. gross margin we can get from our financials which we have down below so we have our total gross profit divided by Revenue so that's your your gross profit margin 88 versus 87 so we're taking our total lifetime Revenue times through gross profit margin is um basically your customer lifetime value so we're saying 44 000 and it looks like that's up month over month in terms of our estimate okay so what can we say we can say continued expansion revenue and reduced churn have increased our LTV estimates significantly based on April metrics our um LTV we project to be 43 889 um which is 21 higher than our March projections okay so very strong here okay CAC and LTV ratio so this is how much profit you make off one customer but you are going to be needing to invest a bunch of money in the acquisition of that customer in the beginning so you want to have to acquire basically a fraction of what you'll make back in LTV so you don't want your customer acquisition cost to be too high we also do need to understand how much do you spend in marketing versus how much do you make back in profit on that customer and so that's what we're going to look at here so CAC and LTV ratio okay so this CAC is oversimplified if you have a really good CRM you'll have better data than this but I just am mostly doing this as a demonstration to show you how to calculate LTV to CAC so here's some data here we're saying that leads generated 52 69 then we had a conversion kind of from lead to sales meeting and then sales meeting to customers required so we know we acquired two customers and then three and then we have some financial data ad spend sales team compensation other marketing and so we're saying that our acquisition costs are 17 500 and then they're about 22 000 here and so we would want to have other metrics again you know probably the leads that we're generating in April aren't actually uh driving the conversions in April probably the conversions in April are from leads in a prior month and the leads in April are for conversions in the future month but just to keep it simple it's good to report metrics at cost per lead cost per meeting so you can understand top of the funnel mid funnel and then the conversion is is bottom of the funnel so customer acquisition cost we're saying is a total sort of marketing activity divided by two customers acquired and here it's three customers acquired so seventy three hundred versus eighty eight hundred and so if we spend 7 300 to acquire a customer and then after we've acquired them we expect to make 44 000 of profit our LTV to CAC ratio is six and in the prior month it was four six is a very strong number especially for an early stage company um five and up is is very very strong and sort of even sort of three and up is is still pretty good in the early days so okay investor update so let's write okay so what do we want to say about about this so I think we can say um we we didn't mention the three accounts that we had acquired so if we converted three new accounts in April um up from two in March as we continue to improve our sales process we can also say maybe we knew anecdotally that word of mouth is driving increased organic leads and meetings on driving our top and mid funnel um leads down lead cost down so you can see here you know maybe our cost per lead went down maybe our cost per meeting went down significantly um effectively what you want to explain is if your went down why did it go down if your LTV went up why did it go up so you need to explain that story these improvements drove CAC down 17 percent I think that's 17 percent 17 percent and let's see how much our LTV attack ratio Rose 46 percent month over a month over a month from a 796 in March to 7281 in April and finally between the increase in projected LTV and drop in CAC our LTV to CAC ratio improved 46 percent month over month from 4.13 to 6.03 so that's obviously a really good news so that's going to give your investors a good sense of sort of how you're trending now we're going to talk about burn Runway and then finally financials so when you're talking about your burn rate that's how much cash did your business burn in a single month so the easiest way to do this is just look at beginning of the month cash and end of the month cash and then how much cash was was left over so you you had 744 at the beginning of the month and then at the end of the month you had 6.95 so you burned forty eight thousand dollars same in April you know we burned thirty six thousand dollars so when investors ask what is your Runway that means how many months of cash do you have until you have no more cash so how many months of cash you have um for your business so a lot of investors will just say they'll take your end of month cash and you'll divide it by your burn rate and so they'll say okay if they keep burning this amount of money each month we had 14 months of cash and if they keep burning this amount of cash each month they have 18 months of cash so a lot of investors do this even if you give them a projection and say no it's a specific month that they'll just do it like this but if you do have projections and you're doing Cost Cuts or you have visibility into your sales then use your projection so like in our scenario let's say in March we've given guidance that we're going to break even by October um and then now we say we're going to break even by August because our our numbers are looking really really good so use your projections if if you have them okay so we reduced our burn from 49k to 36k on the back of improved retention growth and reduced CAC and then based on our forecasts we expect to hit cash flow break even by August okay so finally financials here's how I recommend you think about your financials so you want to be sending out a monthly report on on the financials of your company we're saying here that we had April 2024 actuals versus April 2024 budget so budget versus actuals sometimes it's useful a lot of times what's more useful is just looking at April 2024 actuals versus March 2024 actuals so people can actually see the change in Trend because if your budget wasn't very accurate then sometimes it's just sort of noise but in either of these scenarios here's how I like to kind of compare the months so you have your difference and then I like to say like percent so I would just take this number and divided by this number so and then here you can take this number divided by this number to just look at the sort of percent change and so here's how to kind of do this and we're just going to walk through the numbers so you can get a sense of sort of what they mean and then we can just copy this over to the other column so let's say you know we're we're really tracking everything against our budget and so we say okay the actuals we beat our budget it was 67 000 so we beat our budget by 8 000 in terms of on the expense side you do want budgets especially on the expense side to try to control your costs so we're saying that we we're basically right on budget in terms of cost of sales maybe it's slightly over but very close and then gross margin we outperformed by eight thousand dollars because of the increase in Revenue in terms of operating expenses um you know we were generally under so we were under by about three thousand dollars so that's good news and so operating income outperformed from an outperformed on the gross margin outperform on the expense side but one thing is that your operating income doesn't reflect your cash flow because if you're capitalizing software development things like this doesn't really flow through your income statement in the same way that it's hitting your bank account and so you always want to look to your cash flow statement and you'll see that your operating income in in April was 28 was negative 28 000 but your actual cash burn was negative 36 000. so just make sure you're watching out um to understand the difference between your burn rate and your negative operating income so if we just look at kind of month over month actuals we could also use this and say you know growth was 22 we know growth was 22 percent um you know in this scenario actually our gross margin increased by quite a bit you know we we got a little bit of a higher percent on the gross margin increased by 24 percent then we have our operating expenses were down month over month on increased Revenue so Improvement in operating income Improvement in Burn rate so these are a good way to sort of track your metrics and then decide you know what you're going to say about them so here's like a couple ideas on on what you could say so let's say outperformed budget by 14 percent 14 percent on revenue and we grew Revenue 22 month over month so we know that what else improved gross margin slightly from 87 percent to 88 percent from operating Leverage so that's here you can see we're getting basically more uh margin and so operating leverage you'll hear this term sometimes operating Leverage basically means more Revenue slash profits um without increasing costs so you have a team in place and you can continue to drive more Revenue so you're seeing flat cogs but you're able to actually drive more Revenue through the same hosting support credit card fees cogs and so that's called Leverage you're getting operating leverage out of a fixed cost base and and then improved in for efficiency on top of it okay what else you have reduced overall Opex by two percent you can see here month over month driven by mostly by this so that's Consultants driven by cutting redundant consultant and then you can say operating loss narrowed from 41k in March to 28th K in April so that's a 32 percent reduction in operating loss so you can see that here and we already talked about our burn rate so I don't think we need to cover that again Okay so now we've basically written our investor update we just need to uh combine all this stuff together so here's how you write an investor update so okay so let's organize this so this is the kind of thing you'd want to write in an email at the end of every month one thing about investor updates most startups will write investor updates when their numbers are good and they'll stop writing them when their numbers are bad but investors know this so if there's silence investors generally are going to think that your business is doing terribly because it's sort of a natural psychological thing to stop reporting bad numbers but it's good practice to write an investor update every single month on a schedule no matter what the numbers are it's better you'll be more accountable as a team and also you know if your investors can step in and help you if they know what's going on they're obviously going to try to help you so it's better to do this so the first thing in an update you'd want to write like a couple highlights so just as a summary and then you can kind of summarize all the metrics below so let's say in April we had a very strong month we generated a record mrr growing 22 percent month over month along with a significant reduction in Burn so that's a quick highlight usually include the good and the bad so we've gone a lot of bad metrics in in the data that we just reviewed but you'd want to include like good Bad and the Ugly um churn remained low at three percent and we drove continued expansion revenue from existing clients um we expect to hit break even in August and then if you have any asks you could say you know we are looking to hire a VP of sales soon and let us know if you know any potential candidates and then sort of do your overview so here's how I would do this I think you can just paste in what we already wrote below so here's how I would just do this so we have two lines here and so I'll just skip ahead so when this is done so we can kind of look at this okay so now I just linked in everything we wrote below underneath each of the seven SAS metric titles and I can say April 2024 investor update highlights overview of SAS metrics and kpis kind of put a box around this and our investor update is done so we wrote it as we calculated all of these numbers so you could send this straight out to investors this would be a fantastic update much better than most startups are sending and it would give them a lot of faith that you are tracking the most important metrics and it would also be very very useful for fundraising because you'll be on top of your metrics and you could forward a prior investor updates to new prospective invest investors who might be interested okay so I hope this gives you a great understanding of the most important SAS metrics and how to track the financial performance of SAS startups first off as always you can download this Excel model completely for free just look for the download link in the description below also if you want me to teach you everything I know about Finance for startups in a small group with personalized support from me join the wait list in the description below for a chance to join the next cohort of my training program Finance for startups and if you want to support my Channel please like subscribe or leave me a comment thanks for watching and I'll see you in the next video