Traditional budgets exist to limit spending and keep expenses under a certain threshold. This budgeting method works just fine for most non-SaaS companies, where expenses are not necessarily directly tied to profit and growth.
In the SaaS world, however, things work differently. You’ve likely heard this adage: “You have to spend money to make money.” In this case, it happens to be true. Your company’s growth is often a factor of how much you invest in processes, because you can’t scale your services up without paying more to support them. In other words, to put a hard limit on your SaaS budget is to put a hard limit on your company’s potential growth.
On the other hand, your profit or loss will occur between your top line revenue and your operating expenses. This concept is important to remember when creating a flexible budget, because the point of aiming for flexibility in your spending is to allow for greater growth and profitability. The trick is to strike the right balance on both sides so that your profit increases proportionally more than your expenses.
Think of it this way: Instead of asking, “How much do I want to spend?” ask, “How much do I want to scale, and how much do I have to spend to reach that level?”
This article can’t make those decisions for you, but it will help you decide if a flexible SaaS budget is right for your startup.
Does Your Company Need A Flexible SaaS Budget?
Different types of budgeting exist for different reasons. Not every business model can safely and successfully adopt a completely unique strategy at any given time. Make sure you can thoroughly answer the following questions before proceeding.
Can you afford to risk it?
Most budgets are built based on estimates of how much capital the company has to invest in a particular team or project. When resources are fixed or scarce, creating a firm limit that should not be exceeded might make sense.
Flexible SaaS budgeting flips the usual budgeting concept upside down. Instead of spending up to a certain limit and then treating that limit as a giant red stoplight, your expenses suddenly turn into investment tiers. As the amount invested grows, your expected outcome should grow proportionately.
You may get halfway through the year and realize you invested too much money in development and not enough in sales and marketing strategy — which failed to produce the boom in customer acquisitions and lead generation you were expecting. Would that be a minor setback or a massive iceberg that would sink the ship?
What resources do you need to reach your goals?
Let’s say you’d like your business to grow by 100% this year.
- What sort of sales team would you need to double your annual recurring revenue (ARR)? Your monthly recurring revenue (MRR)?
- What marketing budgets and efforts would help you scale up to that level?
- Do you need more developers to build new products and features?
- How much would it cost to support the increases for all these teams?
It’s not enough to simply pour twice as much money into the same resources you’re using at your current level, because some expenses don’t scale linearly.
For example, one way to develop a flexible budget is to use headcount and retention as the budget drivers. Each new sales team member, marketing person, and developer you hire will need licenses and other tools to automate processes. Some SaaS companies charge proportionally more or less for a larger pool of user licenses. Once you know how many new team members you may need to reach your target revenue growth, you can determine the cost of additional licenses and other expenses for new hires on a per-person basis.
- The more accurately you predict your headcount the better you will be able to negotiate for better prices on software licenses before you need them.
- Hiring more employees does not always necessitate the purchase of more software licenses. Before purchasing, go through your existing licenses and identify redundant or unused licenses to eliminate due to churn or misuse.
Employee costs don’t stop at salaries and software licenses, however. For that reason, it might be wise to look for opportunities to help existing team members learn and progress in their careers. If your employees take advantage of continuing education, that could bring them up to speed enough to reduce the number of necessary new hires, resulting in a win-win for everyone involved. Backfilling resources due to churn costs more than investing in existing team members.
This all boils down to a central point: Flexible budgets do a better job at predicting costs and forecasting revenue than a traditional annual budget process.
It helps to know precisely how much you’re spending and earning in as close to real-time as possible. There’s no longer any need to wait a month or two to receive last month’s numbers from your accountant. With the constantly updated dashboard provided by Zeni’s finance dashboard and bookkeeping system, you can log in and get an accurate picture of your finances anytime you’d like. You can gain confidence making major budgeting decisions and you can update forecasts right on the Zeni dashboard, so that you have flexibility and adaptability around changing business circumstances.
Having a real-time, detailed picture of your finances also makes it possible to build multiple potential budget models. You could, for example, see what it might take to reach 200% or even 300% growth in a given year. The more data you have, the more accurate your projections will be since you can view scenario planning in a dynamic platform with actual data.
What are some common SaaS budgeting mistakes to avoid?
- Avoid Budgeting In Silos: Often companies create SaaS budgets in silos. Sales has a budget. The marketing team has a budget. Finance has a budget, and so forth. However, it’s rare to find that a SaaS business tool that is not applicable across departments. As you evaluate what tools fall into your flexible SaaS budget and build your organization’s SaaS budget template, be sure to have conversations with leadership across the organization and gather input. This will help eliminate duplicate software platforms and applications and give you a more accurate number of users on which to base your flexible budgets.
- Avoid SaaS Tools That Limit Growth: When evaluating your budget and the tools your company uses, view each product that you use as a tool for growth. If your team is growing or your client base is growing, it may be worth reevaluating if your software solutions or subscription terms can support significant scale over time. If you anticipate that an application will only meet the company’s needs in the near future, do not sign a long-term agreement. Alternatively, you can also secure better deals on multi-year agreements, better contract terms and save time training employees in new software if your company anticipates using an application for the foreseeable future.
Zeni’s professional finance team can ensure your numbers and projections are accurate before making any major decisions.
While there is no set formula across the board, the success of your flexible budget hinges on the accuracy of the data you use to build your projections. If there are errors in your data, you risk creating a budget that won’t help you hit your targets.
If you aren’t completely confident in the accuracy of your financial information—or in your ability to develop a realistic budget based on your projections—it doesn’t mean you can’t use a flexible budgeting approach for your company. It simply means you need some help getting there.
Let Zeni’s real-time updates and expert finance team guide you toward the growth you know your company can achieve. Schedule a demo to see how Zeni works.