How to forecast SaaS revenue?
Hey guys, I need to build an operating model for a SaaS company and wanted to get some guidance. I have a classic file with customer data: customer names running down the rows, months running across the columns, and MRR in the values. I’ve already set up the historical ARR funnel and pulled through the values from the customer file as normal: Beg ARR + New Logo ARR + Upsell - Downsell - Churn. I now need to forecast revenue (and margins) and drop into our LBO/returns model. I guess my question is what’s next? I’ve done the ARR funnel before previously, but have never walked that into an operating model. Would you just take a perspective on the data you gathered (churn, new ARR growth, etc) and forecast from the funnel level? Would you go back to the customer level and forecast individual accounts and then just extend the funnel lookup formulas? Would you make a new build that has a logo count and ASP (or in this case more MRR) and multiply those? After doing that, how does this translate to revenue? If I’m building a monthly model, do you divide projected ARR by 12 to get MRR, and then lag it a few months (based on some implementation and booking assumption) and call that revenue? Any experienced insight is appreciated. Thanks!
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Make a few sales funnel assumptions like leads/month, cost per lead, SDR/Lead (track headcount growth over months), monthly sales conversion %, monthly churn, monthly net expansion/contraction. Should give you decent monthly MRR sales projections and related costs.
PM me if you want - work in enterprise software PE
For projections I’d roll it up into just beginning ARR, + new, + upsell, -downsell, -churn.
Usually you’d have a bookings type build to get new ARR (with an implementation lag). I’d usually just forecast upsell/downsell/churn based on historical averages unless you have specific forecasts on price increases that you can use or something. Revenue can just be ARR / 12, plug that into the usual LBO model.
If you need cash flow it can get way more complicated based on when cash gets collected but hopefully you don’t need to get into that.
ARR / 12 ??
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