If your SaaS company is growing and you need to hire employees to support and further grow the company, you may be asking the following questions.
🙋 How many employees can I afford to hire?
🙋 When should I hire additional employees and at what scale?
🙋 What if I don’t hit my growth goals?
Startup execution rarely goes to your exact plan. In a fast, changing, startup environment, being able to adjust quickly is key to financial success. Building a robust financial model is the tool to allow your startup to build a growth plan with data and metrics and to navigate and course correct though changing business environments and company execution.
I have listed a series of steps and frameworks to think through your financial planning. Let me know if you need a financial model template.
Financial Model Framework
📊 Develop the current construct of the business that generates and supports revenue, and calculates the cash-flow to operate as well as supporting metrics to measure business efficiency.
➡️ Establish ROI metrics for employee functions to measure revenue contribution (general framework below)
Sales reps: Quota to On-Target Earnings Ratio (3X-5X), Quota Attainment
Sales Development Reps: SDR to Sales Rep Ratio, 1:3
Customer Success: $1-2M ARR per CSM
QA to Engineer Ratio: 1:4
➡️ Build a non headcount expense model that supports each departmental contribution (few examples below)
COGS: unit costs that support ongoing customer product usage
Marketing: customer acquisition spend (example: search, social > signups > trials > CvR)
Software: tools and systems to automate and support business needs
T&E: employee travel and entertainment requirements
➡️ Active Revenue Drivers
Churn: input expected churn assumptions such as monthly customer percentage
Expansion/Contraction: add expansion/contraction assumptions such as usage
➡️ Build a cash-flow model that supports your actual business model (examples below)
Cash-in: Payment terms (monthly, quarterly, annual)
Renewal contracts: Retention rates for monthly, quarterly, annual subscriptions
Cash-out: Recurring vs. Non recurring expenses, Expense functions (Payroll, software, T&E, COGS, etc.)
➡️ Establish supporting efficiency metrics
LTV:CAC: indicates how much revenue a customer generates compared to the cost of acquiring them.
CAC Payback: measures how long it takes for a business to recover the cost of acquiring a customer from the revenue the customer generated.
Rule of 40: The revenue growth and profit margin must be at least 40%.
ARR:Employee: Analyzes the average annual revenue by each individual employee as an indicator of employee efficiency to generate revenue.
Departmental Expense to Revenue Ratio by Revenue Amount: Analyzes total departmental expense by total revenue expressed as a percentage to indicate how much expense is consumed to the company’s overall revenue, providing insight to operational efficiency.
Burn multiple: the amount the company is spending to generate incremental revenue.
Cash runway: the number of months the company has cash to stay in business.
Define Hiring Needs Based On Current Needs and Future Growth Targets
Engineering and Development: build and maintain the software platform at scale.
Product Management: define product features and roadmap.
Sales and Marketing: drive customer acquisition and revenue growth.
Customer Success and Support: ensure customer retention and satisfaction.
Operations and Finance: manage business processes, compliance, and efficiency.
Add Hiring Plan to the Financial Model
Leverage compensation roles benchmarks based on similar company size.
Apply employee ROI ratios wherever possible.
Stagger employee start dates to align to key milestone dates as well as a contingency plan in the event the company does not achieve growth targets.
Make sure the financial model is taking into account payroll taxes, commissions, bonuses, etc.
Add non headcount expenses to the Financial Model
Build an accurate COGS model that scales to customer growth.
Establish an expense model that scales to employee growth such as T&E, Software (adding seats), etc.
Align S&M (non headcount) spend that scales and drives customer acquisition goals.
Triangulate Business Economics to Ensure an Efficient Business Plan
Cash: are you over/under spending, do you have enough cash runway (e.g. 2 years)
Cash burn Multiple: check to make sure your ratio is healthy
COGS: Does your growth plan scale COGS (e.g. driving to >80% GM)
Sales and Marketing: Is your S&M investment efficient to revenue growth (e.g. LTV:CAC >3, CAC Payback <12, Magic Number >1)
Customer Success: Does each CSM manage enough ARR to where retention is healthy (e.g. NRR >1)
R&D: Are there enough Engineers and Product to complete the Product Roadmap that is tied to revenue plans, leverage total R&D expense to total revenue percentage compared to similar company benchmarks, and overall cash burn.
G&A: Is there enough accounting, finance, ops, legal to support current and future growth, leverage total G&A expense to total revenue percentage compared to similar company benchmarks, and overall cash burn.
Scenario Plan for Worst and Best Case in Order to Contingency Plan
📊 Scenario planning example: An increase of 5% churn and a decrease of 15% sales attainment, results in ➡️ $1M less total revenue ➡️ additional $1.4M cash burn ➡️ providing fewer 5 months of cash runway. ➡️ Due to less revenue growth and keeping S&M expenses the same as plan, LTV:CAC has decreased to 2.7X. In order to get back to plan, ➡️ the remaining renewal rate would need to be 95% ➡️ while achieving an 85% overall sales attainment rate.
Financial model should allow for dynamic scenario modeling such as the below whatifs
Customer conversion rates
Sales attainment rates
Churn rates
Unit COGS
Operations variable expenses
Hiring model
Financial Outputs are the financial statements which highlight the health of the business such as cash required to run the business, profitability, and efficiency. (each of the below should have a visual)
Profit and Loss Statement: breakdown of your company’s revenue and expenses, profitability.
Balance Sheet: overview of your company’s assets, liabilities, and equity.
Cash-flow Statement: analysis of cash and cash equivalents flowing in and out of your business.
Variance Analysis and Scenario What-ifs: actual to plan comparison, and scenario planning based on various scenario executions different from the financial model assumptions.
Company KPIs (LTV:CAC, CAC Payback, Rule of 40, Burn Multiple, NRR, Sales attainment, ROAS, Cost per Lead, Magic Number, churn rates, etc.)
Profitability by product lines, etc.
Data visualizations (key business trends by time series events)
3/30/2025
SaaS Finance Blog 