If you're running a new SaaS startup, you may be wondering what balance sheet forecasting is, what income statements are, and how they're related. Few things are more important to your business than the ability to manage your cash flow and generate revenue. Cash is your company's lifeblood and can be the deciding factor between whether your startup succeeds or fails. To run your startup successfully, you need to implement effective SaaS forecasting practices and understand how to organize income statements.
At KPI Sense, we want to help you with cash management, so we're breaking down SaaS company balance sheet forecasting and SaaS income statements.
A balance sheet is a financial statement that shows your business’s assets, liabilities, and equity. Your balance sheet will be tailored to meet your company's specific needs, but in basic terms, the essence of the sheet is that it shows what a company owns and what it owes at a point in time.
Assets are everything your company owns, such as cash or account receivables, liabilities are everything your company owes, such as loans or deferred revenue, and equity is your company's value after you subtract what you owe from what you own. Your balance sheet needs to follow one universal rule: Assets = Liabilities + Equity. Your balance sheet makes sure everything is balanced and in order.
Balance sheet forecasting is simply the projection of your company’s assets, liabilities, and equity in the future. The projection estimates the balance between what you own and owe based on your historical and current data.
Your company needs a financial model to assess your financial position in the past, present, and future. The financial model consists of three financial statements:
You need all three of these statements to have an efficient model. In fact, the cash flow statement can be derived using your balance sheet and income statement. Essentially, the balance sheet shows just how quickly your assets can be converted into cash now and in the future, and this is one of the most important factors potential investors look at. See why balance sheet forecasting is so important?
As a part of the financial model, a balance sheet helps you figure out how to finance your company. Balance sheet forecasting will let you know when your company will run out of cash under certain circumstances. Through your forecast, you will be able to understand how your present-day business decisions will impact your company’s financial position in the future.
Especially for SaaS businesses, balance sheet forecasting is a crucial component. Because SaaS businesses have deferred revenue, your balance sheet will need to be able to track this deferred revenue. The forecast will allow you to understand how upfront payments will impact your business for your present-day decisions.
However, it’s important to note that your financial model and forecasts are only as accurate as your data. Making sure your data is clean and correct is essential for dependable forecasts.
The logic and assumptions your financial model is based on are important but are also just as tricky to create. The good news is that if you’re stuck, we can help you build a financial model you can trust and depend on.
Having a balance sheet should be the first thing on your list; creating the forecast should be the second. Balance sheet forecasting can help you track your liquidity, and it also makes sure all your other financial data points are in order and accounted for. The balance sheet serves as a good health check to ensure you aren’t missing crucial components.
Having a balance sheet early on in the life of your business will lead to more accurate predictions and will allow you to avoid running your business based on bad assumptions and habits. With a balance sheet, your business decisions will be both centered on and backed by data.
The deferred revenue component of SaaS adds another layer of complexity for revenue recognition, but maintaining an accurate balance sheet will help keep your financial model and business in good condition. Tracking and projecting your deferred revenue at an early stage will ensure all your payments are correctly accounted for.
Though startups use both balance sheets and income statements, these major financial statements have some key differences. The following are the main differences between a balance sheet and an income statement:
In short, your balance sheet shows what your startup owns and owes, along with your long-term investments. Investors look to your balance sheet to decide if you're successfully leveraging debt and managing your assets.
Your income statement will show your startup's financial health and whether it's profitable. You can use your income statement to monitor your revenue and expenses closely, so you can grow your revenue while keeping your company's costs under control.
Analysts and investors will keep an eye on your income statement's operating section to assess your performance. They'll also examine your balance sheet closely to get a full picture of your business's current financial health and potential.
Balance sheets include assets, liabilities, and equity, and analysts focus on a few key items in each section:
To forecast accurately, use a few years of data and supporting schedules. Using a few years of data in the model can give you context for your forecast, and using supporting schedules can help you with your calculations. You can create your forecast in a dedicated separate worksheet or in the same worksheet. You'll do your calculations in these worksheets, and your consolidated balance sheet will pull the forecasts to give you a clear picture of your startup's finances.
Follow these steps to forecast a balance sheet:
The B2B and B2C business models can have several differences. Depending on whether your SaaS company is B2B, B2C, or a hybrid model, you may have to adjust your balance sheet forecasting or income statements.
Your startup may be B2C, B2B, or a combination of both. With a B2B business model, you may make more per customer but have fewer customers. B2C is the opposite — you may have more customers but lower revenue per customer. SaaS companies usually use the hybrid model because they typically have different tiers of service. Depending on the service you're delivering, it could be tailored to an individual consumer or company.
These differences could affect your balance sheet forecasting. B2C tends to be more complex, which could be reflected in your balance sheet.
B2C and B2B SaaS income statements include the current period you've chosen and the corresponding period from the previous year. Follow the steps below to create an income statement:
Now that you know more about SaaS income statements and balance sheets, let's look at some examples.
A SaaS company income statement should be organized to let stakeholders review financial items like revenue, cost of goods, operating expenses, operating profit, and net income. Your startup will need to maintain several detailed accounts that accurately track liabilities, assets, cost centers, and revenue streams. Organize this information on your income statement for your SaaS company.
For example, your SaaS income statement may track your finances for January, February, and March. First, you'll list every source of revenue and the total revenue. Then you'll list the cost of goods and the total, breaking this down into each individual cost like professional services and hosting expenses. Next, you'll list your operating expenses, operating profit, and net income.
Typically, a balance sheet first lists a company's assets, followed by the liabilities, and ends with the equity. As with other software company financial statements, a balance sheet contains multiple nested categories. You may also include long-term and current liabilities and different kinds of equity. For example, on your balance sheet, you may include the following:
At KPI Sense, we can help you draft your income statements and balance sheets.
Long story short: a balance sheet is a central component to financing your business … AKA it’s responsible for keeping your company afloat. No matter the age or size of your SaaS company, do not hold off on balance sheet forecasting — it will save you time and headaches and help you put your best and most accurate foot forward.
At KPI Sense, we're on a mission to provide startups like yours with strategic finance support. We have helped more than 80 founders raise capital, increase retention, and grow strategically, and we want to help you do the same. We're SaaS-focused, so we can provide you with relevant data-driven insights around SaaS balance sheet metrics and KPIs. Since we've built solutions for so many different businesses and scenarios, we can customize a solution for your startup's specific needs.
B2B SaaS balance sheet forecasting doesn't have to be difficult. If you're looking for help with balance sheet forecasting for your B2B SaaS company, schedule a chat with one of our representatives today and check out our fundraising guide checklist.