Janis Zech: Alright. Welcome to another episode of the RevOps Lab. I'm here with Ben Murray, also known as the SaaS CFO. Ben, welcome.

Ben Murray: Thanks, Janis. It's great to be here.

Janis Zech: Yeah. I'm actually especially excited about this one. I was on your podcast back when we raised from Gradient. And I've been following your work for quite a while. But before I go into that, like, who are you? What do you do?

Ben Murray: Sure. I'm a CFO by trade. So I got started in the airline industry in finance and accounting, then transitioned over to software in the early two thousands and came up through the ranks of financial planning analysis. So forecasting metrics, budgeting, and then became CFO at founder and private equity backed SaaS businesses. And then about four or five years ago, started my own business offering fractional CFO, coaching, have an academy, teach SaaS metrics and finance. And really it all started with my blog at the SaaS CFO dot com.

Janis Zech: How big is the blog? How big is the newsletter by now?

Ben Murray: Yeah. So the newsletter, I just sent a newsletter this morning, and it's about seventy five thousand subscribers.

Janis Zech: Okay. So learning number one, if you wanna learn more about the topics we're gonna talk about, subscribe to that newsletter. Also, I highly recommend to go to your website. What's the exact website?

Ben Murray: It's yeah. The SaaS CFO dot com. So t h e s a a s c f o dot com. Yeah. So that's my blog and where you can download my templates as well.

Janis Zech: Yeah. It's a great website if you wanna understand all things finance and SaaS metrics. And there's a lot of good templates. There's tons of video tutorials and together with the newsletter, I think it's really like an academy. So I wanna plug this strongly because I've spent some time on there and there's great sheets you can download. And so if you wanna learn about finance and SaaS metrics, please go there. And this is exactly what we wanna talk today about. Right? So I think there's this constant debate in RevOps around, should you report to the CRO or the CFO? How do you work with FP&A, especially on the annual planning side, which I think we are now hitting the cycles for most companies. And today, what we wanna do is basically walk through the finance metrics, the SaaS metrics, and then go into a bunch of different questions around how finance and RevOps work together. So let's start with the finance metrics. You know, let's start really simple. Like, what are bookings?

Ben Murray: Okay. So bookings, we talk about in SaaS bookings all the time. So a booking in my definition is an executed contract between us, our company and our client or customer for our products and our services. So really it's just a contract saying they're going to purchase our SaaS subscription, any services, hardware — depends on our revenue streams. So legal agreement. But if you're — and I teach this in my course — if you're like, hey, Ben, I don't speak the bookings language, I don't have a CRM, same thing if you're self-service or PLG, we still have to derive that bookings data because we need to know where our growth is coming from. And again, a booking is not an invoice. It's not revenue. It's not cash. It's simply a signed contract or purchase order.

Janis Zech: Yeah. So it's basically what most sellers are very happy about. Right? When they basically send the DocuSign, refresh every ten seconds to get it signed. And then, you know, like, what are some of, like, so how do you move from bookings to actual revenue?

Ben Murray: Yeah. So that's really interesting. And of course I have a post on that at my blog, but yeah, you think about kind of that SaaS CFO utopia of quote to cash. So right, we send that quote out, we send the contract, the customer signs it. And of course sales is like, yeah, great, perfect, done. But then you ship that contract over to accounting. So now we get that MSA, the sales order, purchase order, whatever it is. And now right, we have to process that. We have to set up the subscription. We have to invoice the customer correctly based on the payment terms, the products that they signed up for in the contract. So we invoice that customer and that could be a monthly invoice, it could be an annual invoice, it could be professional services revenue. And then once we go to close the books, right, that's an invoice. And assuming we're not charging via credit card, you know, it's not cash. It's not revenue yet. It's simply an invoice out to our customer. And then when your controller or CFO closes the books each month, then maybe we have to apply some revenue recognition. If it's an annual invoice, you know, twelve month term, now we have to spread that out over the twelve months. And that's part of that financial close process. Or you hear about closing the books, and then we record that revenue appropriately in that month. And then of course, then we've got to collect the cash. So it's kind of that quote to cash cycle, you know, starting from sales and then finishing with accounting.

Janis Zech: Yeah. That sounds pretty simple, but obviously there are different stakeholders being involved. Right? So you get that purchase order, you take it, you send the invoice. Let's say there's a twelve month deal. Right? Like, you basically — how do you then split it across the months and do the revenue recognition?

Ben Murray: So yeah, with rev rec, there are different frameworks. You know, a very common one is daily rev rec. So it's based on the days in the month. So if we have a twelve month subscription, it's gonna be prorated based on the days of the month. You know, so February, not as many days, the revenue will go down a little bit, that MRR number. Or sometimes you can just take that annual value — let's just say it's a twelve thousand dollar annual invoice divided by twelve and just post a thousand a month. Kind of depends on your subscription start and end dates and your rev rec policies. But basically, we're amortizing or spreading that revenue over from that subscription start date to the subscription end date.

Janis Zech: So it sounds to me like, you know, if you basically sign a deal on the tenth of February and you basically take the full February, that's accounting wise not a hundred percent correct. Is that right?

Ben Murray: Yeah. It just depends. I think people do it different ways, you know, where maybe if it's in the first half of the month, they take the full rev rec. If it's past the back half of the month, maybe half of it. Kind of almost gets to, like, fixed assets and CapEx. But usually on daily rev rec, it depends on when you start the subscription. You know, if it's like, hey, they're starting September twenty first, all right, well then we have to do some proration and usually it's based on the number of days.

Janis Zech: Yeah. Okay. So this is essentially a pitfall and something you have to decide on and basically have clear rules so your accounting system works. Okay. What's an MRR schedule? You know, you talk about this a lot on your blog. Not maybe not everybody's familiar with it. What is it?

Ben Murray: Yeah. So I say your MRR schedule is worth its weight in gold, you know, because it's gonna come up with investors, potential investors, due diligence. So really, an MRR schedule is really just revenue by customer, by month, and generally for your recurring revenue. And I just got this question from a student — what about professional services revenue? No. That's usually excluded. So any one-time revenue is excluded from your MRR schedule. So again, it's revenue by customer by month is the start. Then we could do that by ICP, by pricing plan, SMB versus enterprise. And then what we do, we take that and we create what I call the MRR waterfall. So we take that data and then we have an MRR beginning balance. We have new MRR coming in, expansion, contraction, churn, and that creates our ending balance. Then from that MRR waterfall, that's where we then create or calculate gross revenue retention and net revenue retention.

Janis Zech: Okay. Let's go through this one more time because, you know, we're on a podcast, not everybody's gonna watch the video — actually there's nothing to present right now. So, okay. So you have starting period MRR and then what's the waterfall again?

Ben Murray: Yeah. So getting that MRR waterfall, you think you start the month out. We have a beginning balance of MRR, monthly recurring revenue, and then say we signed a new customer, and then let's say that starts on the first of the month. And so we're gonna — either that maybe that's a monthly invoice or we're doing rev rec on that. So we have new MRR coming in, and then we have our existing customer base. So any expansion revenue, so say you upsell or cross sell that customer last month, and now they're paying more in this month, we'll see a number in that expansion layer. And vice versa, say they contracted, say like, hey, I don't need as many seats. Now they're paying less in the month. Then that's a negative number in the contraction bucket. And then we have churn, right? Customers who just completely lost us. So again, it's beginning balance plus new MRR, expansion, contraction, churn, and that equals then our ending balance of MRR for the month.

Janis Zech: And renewals, do you put them in there as well?

Ben Murray: So renewals, right, renewals will only show up in that waterfall — of course it's in the beginning balance — but only if there's a net change, you know, that it would show up either in the expansion bucket or the contraction bucket. Otherwise, it's just in that beginning balance and ends up in the ending balance as well.

Janis Zech: Yeah. Okay. Understood. So this is basically the MRR waterfall. Right? So based on the schedule. And it's actually really, really important. I think one thing I like about this is, right, like, when you think about forecasting, you usually not only want to forecast your new logo business, you also want to forecast your expansion and renewal business. Right? And this is, I think, you know, something we, as a forecasting tool, deeply advocate for, like, you know, being able to look at the entire revenue input factors that then basically flow into this specific schedule, whether you do that on the ARR side or the MRR side. Right? But yeah, that's really important. Sorry, please go ahead.

Ben Murray: Oh, I was gonna say, yeah, you're right. It's so important for revenue forecasting. You can't just take, you know, hey, I'm running at a hundred k MRR and add a growth percentage to that. To be really accurate with SaaS revenue forecasting, you need that MRR waterfall and then by segments, you know, because if you have an SMB and enterprise product, those retention profiles are going to be much different. So one, it makes your revenue forecasting much more accurate. Of course, we're coming up to planning and budget season for next fiscal year. And then we need that data, the MRR waterfall, to calculate those retention metrics, you know, which then feed other metrics. So it's just so important for that FP&A process and for any SaaS CFO out there and for founders as well to understand their waterfalls and retention schedules.

Janis Zech: So I think this is super interesting what you're saying because most SaaS companies forecast their pipeline on bookings. Right? Like, that's the typical way, and that can be breaking down into ARR often if you have mid market or enterprise deals. So you basically have the pipeline, you forecast new logo, expansion, renewals. Right? And you know, this is to a certain extent happening more on the RevOps side. And then you have essentially the finance side looking at those schedules and looking at the historical data and trying to make sense of, hey, what could the future look like? And I think this is one of the challenges. How do you bring that together? Any tips there?

Ben Murray: Yeah, definitely. Right. As we're thinking about planning or just forecasting in general, or forecasting twenty twenty five, you know, what's that high level number? What's that commit number we're going after for next year, for that next quarter? And as a CFO, I'm expecting my CRO, my VP of sales, marketing, you know, RevOps team to be doing those calculations on their opportunity pipeline so they can then tell me what's that weighted average ARR commit number that they're after. Because I see a lot of people who want to, on the finance side, model that out, but I'm expecting that to come from the RevOps function. You know, because then I can take those bookings numbers by product line, ICP, whatever those segments are, and feed that into my forecast model. So of course, I work with a lot of early stage companies where maybe they don't have that sophisticated pipeline set up yet or really not effectively using their CRM. And then really it's like, all right, tell me your new customer growth, where you think that's going. Then I can look at expansion, contraction, churn and those historical patterns to make some assumption to put together a revenue forecast. So really, it's kind of that — with me, the eighty twenty rule of forecasting is RevOps. I expect them to give me that commit number, of course, and this might be a question coming up, but I need to also understand their pipeline, their lead flow, how that works, what's important, what are those conversion points, you know, just so I feel good with understanding that process. You know, so when I get that data, I understand it better.

Janis Zech: Yeah. I mean, it's always in context of size and maturity of the organization. Right? It's always in context of how many go-to-market motions do you have, how many geo segments you're targeting. Right? It can become very complicated to create a bottom up annual plan. And I mean, we could probably have a completely separate show on that. I wanna dive further into the SaaS P&L. Like, what's a typical SaaS P&L? How does it look like? What are the line items?

Ben Murray: Yeah. So the SaaS P&L, of course, there are a lot of versions out there, but I'd say what I've worked on and just my experience in SaaS, this is how I set it up. And usually, you know, it works for boards, investors, potential investors, private equity. So if we think about the revenue section on our SaaS P&L, we want it by clear and distinct revenue categories. We don't wanna commingle revenue streams. So we need to see subscriptions. You know, so true subscription. So fixed MRR or ARR contracts, no variable revenue in there. And now of course, we've got usage revenue, processing, consumption, transaction — kind of lump that all together as variable revenue. We've got to keep that separate from our subscription revenue. And then next, professional services. If we have the setup, configuration, onboarding of our customers, training, we need that in another bucket. And then also I work with customers who have a hardware play as well. So software plus hardware, and then we've got a hardware line. And then last but not least, maybe managed services, you know, so I'm also seeing a lot of managed services where it's what I call, like, people-powered subscription services revenue. So our product is not delivering that revenue stream. It's still people behind the scenes, but on a subscription basis. So then we could have managed services and then another bucket that may catch conferences, adjustments, miscellaneous stuff. So that's the revenue section. Then we have COGS or cost of goods sold or cost of revenue. And for pure play SaaS, we have tech support, professional services if applicable, DevOps, so your hosting, your architecture, you know, security, and then customer success if they don't sell. And then we could have a variable expense bucket too. For example, if we charge for every Twilio message that goes through, there's a hard expense for that. So I'm gonna bucket that in a variable cost center in the COGS section. So I know I'm covering a lot, but we can circle back here. And then OpEx below gross profit, it's always R&D, sales, marketing, and G&A, and that's just the way it is. So that's the SaaS P&L setup.

Janis Zech: Okay. So revenue, different line items. Not all revenue equals recurring revenue. Right? You basically have the different line items. Then you have COGS. Customer success, is that typically in COGS? Is it not? What's your view on it?

Ben Murray: Yeah. Highly debated topic. Always get a lot of comments on LinkedIn or in my course when I teach that. And so my kind of test is — it's, you know, they're focused on product adoption, the customer journey. They may get a bonus on some sort of retention figure, but they don't have a quota or get paid commission. Then I'm going to put them in COGS. But if they're performing an account management role and they have a commission, then I'm gonna put that down in sales. In early stage, sometimes they're doing both. And then we allocate between COGS and sales.

Janis Zech: Got it. Yeah. I mean, that makes a lot of sense to me, and it's obviously a very important topic as a lot of the compounding growth over time comes from existing customers, the bigger you get. But yeah. And then on the OpEx side, right, like sales and marketing costs, right, like what's typically flowing to that? Because that is actually a pretty important number, I'd say, for all things SaaS metrics. What are some examples, line items that sit in the sales and marketing expenses?

Ben Murray: Yeah. So if we think about our SaaS P&L and below gross profit, we have the marketing costs in our department. So of course, we're gonna have people costs, you know, wages, taxes, benefits. And then of course, very common to have a lot of contractors in certain departments as we scale, so contractors as well. And then of course, marketing is one of those where we have a lot of discretionary spend, so non-people spend. You know, so conferences, trade shows, paid ads, SEO, blog posts, you know, so we want that detail sitting in marketing so we can understand maybe cost per channel, you know, cost per lead, things like that. So that's where marketing usually is — you know, sometimes, I don't know, it varies. Maybe it's half wages and half discretionary spend or even more on the discretionary spend side. So that's where we need a lot of detail in the forecasting process and budgeting process.

Janis Zech: Yeah. I mean, on the sales side, it's probably the opposite. Right? It's very much people driven.

Ben Murray: Yeah. So it's really people driven. So wages, taxes, benefits, of course, commissions, travel. If we're traveling, you know, our CRM software and maybe some training, but really heavy people expenses.

Janis Zech: Yeah. And I think we've all been there. Right? Like, planning out the sales capacities and, you know, how do you scale and what are the ramp times. Right? So we could probably spend another thirty, forty, fifty minutes talking just about that. We will skip that for now. Let's assume we're all set. We have a fantastic P&L. Everything is attributed perfectly. Right? That's also a lot of work. Which goes into that. But so you have all the metrics. Right? Like, let's switch gears to SaaS metrics. What are the SaaS metrics you look at to measure SaaS businesses?

Ben Murray: Yeah. So I developed this five pillar SaaS metrics framework. So in SaaS, of course, we love the acronyms. We have tons of metrics, but I've tried to organize that and also it helps us to measure the right SaaS metrics for the right stage of our business. So the first pillar is growth. You know, so it's really focused on bookings. So new bookings, expansion bookings, where is our ARPA going? So average revenue per account, and then maybe contracted or committed ARR is also a number we could be looking at. So that's the first pillar — it's really good data on bookings and where that's coming from, that growth. Then pillar two, right, we're landing customers, we're expanding customers, now we're retaining them. So pillar two is all about retention. So customer retention, gross revenue retention, net revenue retention, and then potentially some sort of CSAT or NPS measure to support the retention story. And then also, if you're in an annual contract or multi-year contract setting, renewal rate is very important in that. And then pillar three — you're going to throw a lot of things at you, but some show notes to this. But pillar three is margins. As we scale, gross profit is so important. We know best in class gross profit for pure play SaaS is eighty percent, and we want to scale to that eventually. And then also, if we have multiple revenue streams, we need to know margins by revenue stream. You know, how much is subscription contributing, variable revenue, services, hardware, for example. And then pillar four is our financial profile. So EBITDA, rule of forty — ubiquitous SaaS metric — our OpEx profile. For example, how much are we spending on R&D as a percent of revenue? That's gonna scale over time in a certain direction. And then finally, efficiency. So pillar five. So go-to-market efficiency. So CAC, CAC payback, LTV to CAC, cost of ARR, maybe magic number. And then also really important, you know, if you're trying to get that path to profitability, it's org efficiency. So revenue per FTE, and then I created a metric called the ROSE metric, which is recurring revenue generated for every dollar of employee and contractor investment — really accurate metric to determine if you're on the right path to profitability. So that's my five pillars. A lot of metrics there, but that's what I implement, you know, and teach for my students and clients.

Janis Zech: Okay. A bunch of questions. We'll go through these different buckets now and just try to dissect them a bit more. But like, so on growth. Right? Like, you mentioned bookings. Is it bookings? Is it ARR? Do you try to normalize it for twelve months? How do you do it?

Ben Murray: Oh yeah. I just had that question in my private student Slack community. Someone, you know, do I annualize that? You know, if say I have a renewal, but it's a prorated term. And so yeah, if it's ARR, say they sign up and it's just a six month term and then they want to do a one year term. Usually what we're going to do is I am going to annualize that as long as we have decent retention, because we don't want to over inflate our bookings number. But if we feel good to annualize that number, say it's a renewal, a prorated renewal, I'm going to take that ARR value because it's important to push that ARR value into our go-to-market efficiency metrics. So I'm okay with that as long as retention is okay — that, you know, if I annualize that, but then they churn after six months, you know, if a lot of that happens, then we have to reconsider.

Janis Zech: Yeah. Okay. And do you look at year on year growth metrics by month, by quarter?

Ben Murray: I like to look at growth metrics for bookings, and yeah, for bookings, usually on a three month period versus the three month period a year ago. Or even better, the longer that timeframe you measure, the less people could argue about your growth rate, right? Because it's easy to just say, hey, we had a great month this month versus a year ago, but the longer time period, the less people can argue with that growth rate you're presenting. So if you can do like a TTM, trailing twelve months, over the prior twelve months and show a fantastic growth rate, man, that's great. But usually I do three months over a year ago, three months.

Janis Zech: Yeah. Okay. Okay. Any benchmarks on growth? I mean, I know there's a lot out there. Right? Iconiq released some great reports on benchmarks on growth, but like, yeah, any views on that?

Ben Murray: Yeah. Iconiq produces some fantastic reports and, you know, you have to be careful with growth. It's — I think it's in the eye of the beholder because it's very subjective. If you look at, say, an Iconiq, you know, these kind of best in class investment funds looking for elite growth where they may want two hundred, three hundred, four hundred percent growth. And you look at SaaStr and Jason Lemkin saying if you're early stage, you need two x growth to be VC fundable. Now the benchmarks I work with, I'm partnered with Ray Rike at Benchmark dot ai, and he produces private SaaS metrics benchmarks. And those, you know, it's like a little bit more down to earth where maybe it's, you know, a median growth rate is fifty percent, top performance is a hundred percent. So I think you just have to be careful. And I was just talking to a client the other day where, you know, they're growing at a huge rate, but then their board wants them to grow at three hundred to four hundred percent. So it is kind of all over the place.

Janis Zech: Yeah. Obviously, in context of where you're at. Right? So if you're below one million, ten million, twenty five, fifty, a hundred, two hundred, two hundred fifty, five hundred. Right? It's like all different growth rates. You know, I think, like, if you wanna learn more about year on year growth metrics, there's one Iconiq report which looks at that, and for example, just as a metric. Right? Like, best in class for below twenty five million is now up from seventy five percent to eighty nine percent. Which I think is interesting. But then also twenty five to a hundred million is actually down from twenty twenty one, ninety percent to now twenty eight percent. And I think this is essentially the change. Right? We've seen growth at all costs to efficient predictable revenue growth. I think everybody's familiar with that by now. But obviously, it changes the financial metrics significantly and is probably in many cases not seen on the growth rate but more on the efficiency metrics. Right? You had five pillars. Now I'm getting — I need to remember what was the second pillar.

Ben Murray: Second pillar is retention. Right? So we land our customer, expand them, now we've gotta keep them.

Janis Zech: Right. So NDR and gross net dollar retention. Like, what's the definition there?

Ben Murray: So gross dollar retention, that max is at a hundred percent, and then it subtracts churn and downgrades or contraction. You know, so it's really focused on our existing customer base and what we're keeping from our existing customer base. And then NDR builds on top of that. So really it's GDR plus now we can take credit for expansion. And of course, we want that number above a hundred percent. So it doesn't factor in any new customers, just expansion on the NRR side.

Janis Zech: Yeah. And I mean, right. Like, I think that's basically if you wanna create a really successful company, you wanna see — and you are probably above a hundred ten, a hundred twenty percent. Right? So if you do nothing, you would still continue to grow revenue at the clip of, like, ten to twenty percent year on year. Right? That's kind of the metric?

Ben Murray: Yeah. So right. And it depends on your price point. If you're selling a fifty dollar price point product, the expectations are much different than a hundred thousand. So generally, you see best in class higher price point, a hundred twenty percent NRR and above is great. And then it could be one ten for, you know, as you move down ACV. But then if you're a B2C app or just say ten, twenty dollars a month, much different. Maybe it's just, hey, let's just get to a hundred percent. If we're just a little bit over a hundred percent, that's really good.

Janis Zech: Yeah. Great. Great. Let's move to bucket three. Margins. Yeah. What's the most important thing to look at there?

Ben Murray: So really, we've got to have an accurate gross profit. So revenue less COGS. And I do a ton of coaching sessions on just expense coding and COGS versus OpEx because I see those being coded inaccurately all the time. Because we can't — you know, it's a big hurdle. If we have low gross profit, say we're a ten million ARR company and we're running fifty five percent gross profit, that's trouble. But if we're a million ARR, that makes sense. Right? We're scaling. We're building out. The expectations are different based on ARR size, but eventually that gross profit has to climb into the seventies. Otherwise, it just holds back cash flow, EBITDA, and it's just hard — we're just limited because everything's being eaten up by COGS.

Janis Zech: Yeah. I think it's so interesting. I spent some time investing in companies, and I think as a startup, you always refer to revenue as ARR. So it's all recurring. Ideally, you know, five year term minimum. But the reality is different. Right? The reality is not everything is SaaS. Right? So your gross profit in the marketplace has a very different margin profile often than in software. But software, like, seventy percent plus is your — do you think AI and kind of the cost of AI will change that, will eat into COGS significantly? Are you already seeing that?

Ben Murray: Yeah. It's interesting. You know, the AI — and I was just at a SaaS conference and there was a presentation on that where, you know, they're thinking like, yeah, initially the AI infrastructure, getting that going, will have, you know, you'll show early stage low gross profit, but eventually that should scale appropriately. So it's a big consideration — how AI intensive is your product — because I've seen other SaaS companies where it's like a very database-like product. So they'll never hit say seventy five percent gross profit because there's so much compute power that they need. And same thing for AI, we've got to understand how much power are we going to use. And we have to understand, are we ever going to get seventy to eighty percent? If not, why? Because we're going to need to explain that to our board, investors, and potential investors just so they don't look at our P&L and say, well, what's wrong with this company? Well, you know, this is what's going on. This is why we need this infrastructure.

Janis Zech: Yeah. I think you said something which I think also resonates super well with me is if you have high growth, you know, gross profit margins don't matter as much initially. At some point, they'll matter. Right? So I think that's something to keep in mind. But then also, I think being very aware of what's realistic and where can you get to — I think, yeah, as a revenue leader, is super important. I wanna talk about actually bucket five. Right? Because this is a RevOps podcast. So obviously go-to-market efficiency matters a lot. You know, what are some of the key metrics you look at there and how would you define them?

Ben Murray: Yep. It all starts with CAC. So customer acquisition cost, you know, building that foundation correctly on your P&L. We have accurately coded sales and marketing expense. And then CAC payback, you know, top investor and operator metric. So the months to pay back that upfront customer acquisition cost, and it's also gross margin adjusted, which is why we have to have the proper SaaS P&L setup. Then of course, once we have CAC and CAC payback, calculating lifetime value, and then we can calculate LTV to CAC. And then there's cost of ARR. Sometimes that's called the SaaS CAC ratio. That's really the cost to acquire a net new dollar of ARR. Great metric, great benchmarks, easy to understand. And then you can also segment that between the cost of new ARR and the cost of expansion ARR. So those are the big ones that I implement or teach in my course. And then there's also magic number, you know, and that just depends on kind of price point, I think, and sales cycle. But those are the big ones for go-to-market efficiency.

Janis Zech: Yeah. So LTV, like, how do