Strategic Finance Toolkit

RPO or remaining performance obligation is the sum of deferred revenue (advance payments for services not yet delivered) plus backlog (the amount of money contracted but not invoiced).

Gross margin is the difference between the revenue generated from a software product and the cost of delivering that product (also called cost of goods sold or COGS) expressed as a percentage of the total revenue.

MRR is the sum of the predictable or confirmed revenues your company earns from active subscriptions every month.

ARR is the recurring revenue from your SaaS business’ subscriptions, normalized over a period of one year.

Subscription revenue is the cash a company earns when a customer subscribes to its product or service.

The revenue run rate is an annualized version of a company’s earnings during a shorter period (a week, month, etc.)

The Rule of 40 states the sum of a SaaS company’s revenue growth and profit margin should be equal to or greater than 40%

Gross Revenue Retention is the percentage of revenue a company retains from its customers over a defined period (usually one year).

Net Revenue Retention or NRR is the percentage of recurring revenue a SaaS company retains from its existing customers over a specified time period.

The churn rate or customer churn rate is the percentage of customers that do not renew their subscriptions over a specified period such as a month or year. The revenue churn rate is the percentage of revenue a company loses over a specified period.

Total marketing and sales spend in a previous period / Number of new customers acquired in the current period

CAC Payback Period is the time it takes a company to recoup the money it spent to acquire a customer.

The LTV:CAC ratio compares the average revenue you generate from your customers with the cost to acquire them.

The SaaS Magic Number quantifies how much new incremental recurring revenue is generated for every dollar sales and marketing (S&M) spends. Your company’s SaaS Magic Number lets you and potential investors gauge your sales and marketing efficiency.

The burn multiple measures how much capital your SaaS company spends to generate $1 of new annual recurring revenue (ARR). Created by Craft Ventures co-founder David Sacks, it measures how efficiently your company converts its spending into ARR. The lower your burn multiple, the less your company is spending to grow.

The SaaS quick ratio measures the revenue growth of SaaS businesses by comparing the revenue flowing in (through new customers and expansions) and revenue flowing out (through churn and downgrades).