Introduction**
SaaS (Software as a Service) costs are a critical component of any funded tech company’s budget. Getting it right for the 2024 Annual Planning cycle is more critical than ever. And it’s not just that investors are expecting more from finance teams: getting it wrong has real implications related to shareholder dilution and even may be existential for your business.
Funding is more difficult to come by than has been for years. According to Ernst & Young, venture capital investment in the second quarter of 2023 fell to $29.4 billion, down from $44.4 billion in Q1 2023, a decline of 34%. So raising new capital to fill the hole left by uncontrolled SaaS spend is not a given, but even if you do manage to raise, that capital will be much more dilutive than before.
According to Janelle Teng of Bessemer, the multiples of publicly traded software compares have fallen 64% from the 2021 peak of ~39.4x. Multiples in public markets cascade down to private technology companies as it forces investors to assume lower valuations at an eventual future exit. Lower multiples mean lower valuations, more dilutive funding rounds for shareholders, and less valuable options for team members. Better control of SaaS spend can play a pivotal role in delaying or avoiding a funding round in a down market.
Notwithstanding the fact that accurately forecasting SaaS costs is more important than ever in the 2024 budget cycle, we would argue that this ability is vital at all times — regardless of the market conditions — for several reasons.
How the ability to accurately forecast SaaS costs benefits VC-backed companies:
- It allows you to determine your burn rate and burn multiple. This is important because it helps you manage investor expectations and understand how much time you have left before being forced to raise additional capital. If you don't have this information, then investors may think that you're burning through money too quickly or not investing enough in sales and marketing - neither of which are good for your business.
- It helps determine whether or not your company has enough runway (i.e., how long can you go without raising money) based on projected revenue growth rates and other financial considerations such as product development costs, employee salaries, etc.
- SaaS costs are a major expense for funded tech companies. They impact your burn rate, burn multiple, margin, CAC, and other key metrics that you need to
- Allows you to pinpoint the source of unnecessary costs, thereby impacting burn rate, burn multiple, margin, CAC, and other key metrics. Understanding not just the magnitude but also the reasons behind high SaaS costs is crucial for devising effective strategies to reduce them.
This guide will provide some tips on how to forecast SaaS costs for your funded tech company so that you can make better decisions about how much money is needed for future expenses. And whether or not it makes sense for the company to raise additional funding from investors or debt providers.
The Rise of SaaS Costs for Buyers**
In this era of digital transformation, SaaS is a core component of business operations. But, according to data from Cledara (analyzing a set of 1,000+ companies and 250,000 software purchases and renewals from the first half of 2023), its costs are on a steady incline.
Our findings show a clear trend: in the long run, SaaS spend invariably increases. To put this into perspective, companies are spending an average of 17.9% more on SaaS than they did a year ago. This is a significant financial shift, one that can have a profound impact on a company's bottom line.
Alongside escalating costs, SaaS sprawl — the proliferation of SaaS applications within an organization — is also on the rise. Companies were found to be using an average of 21% more SaaS apps in July 2023 than they did a year earlier. This expansion not only burdens IT management but also adds to the overall SaaS expenditure.
However, not all of this spend is being put to effective use. Our data reveals a striking waste rate: 27% of SaaS spend is squandered on unused, forgotten, or duplicate subscriptions. This is a significant drain on resources that could be better invested elsewhere.
These alarming figures are catching the attention of corporate executives. According to a recent survey by Battery Ventures, Q3 2023 data shows 29% of CXOs want to reduce SaaS spending. This figure has risen dramatically from 11% in Q3 2022, indicating a growing awareness of the financial implications of rising SaaS costs.
The same study showed that a substantial 93% of CXOs expressed a desire to consolidate their SaaS vendors as a measure to control SaaS expenditure. This is a strategic move that can not only reduce costs but also simplify IT management and improve security.
Almost half of the CXOs surveyed (48%) expressed an interest in optimizing SaaS licenses, another effective strategy for managing SaaS costs. By ensuring that licenses align with actual usage, companies can avoid unnecessary expenditures and maximize the value they derive from their SaaS investments.
Reflecting the growing concern about unchecked SaaS costs, Battery Ventures’ data shows tightening controls over SaaS purchases. In Q3 2023, only 46% of respondents allowed developers to select their own SaaS, a significant drop from 74% a year earlier in Q3 2022. This trend suggests a shift towards more centralized control of SaaS procurement, a move that could help curb SaaS sprawl and rein in costs.
In conclusion, the unchecked rise in SaaS costs is a growing concern for businesses, with measures to manage and reduce these costs becoming increasingly critical.
Key Challenges CFOs Face in Forecasting SaaS Costs**
Fast Growth, Even Faster SaaS-buying
Funded tech companies are often characterized by their rapid growth and scaling, presenting a unique set of challenges to their Chief Financial Officers (CFOs) when it comes to predicting future SaaS costs. As these companies gain traction and grow, the number of software subscriptions and seats required can fluctuate dramatically. This constant flux, paired with the inherently rapid pace of the tech sector, makes it extremely difficult for CFOs to project costs accurately and effectively for months or years into the future.
Lack of Historical Data
Additionally, the youth of these funded companies often means a lack of historical data from which to extrapolate future costs. Without the benefit of years of usage data, financial officers are often left attempting to predict growth patterns that are unpredictable by nature. This lack of data makes it harder to foresee future expenditures and can potentially lead to budgeting issues and financial instability.
Complex Pricing Models
Further complicating matters is the complex pricing models often associated with SaaS products. Pricing tiers, add-ons, and highly customized enterprise plans can all create a convoluted pricing landscape that's difficult to navigate. Attempting to forecast how usage will map to these intricate future pricing structures is a significant challenge faced by CFOs.
Unplanned SaaS costs
The introduction and adoption of new SaaS products is another area of concern. User adoption can be unpredictable, with some products quickly becoming indispensable to a company's operations, while others may see slower uptake. Unplanned software costs associated with these new products can significantly throw off financial forecasts, leading to budgeting issues and potential financial instability.
Challenges with Data Transparency
Lastly, data transparency—or rather, the lack of it—can pose challenges to CFOs. Some SaaS vendors may provide only limited data and metrics on usage, leaving financial officers with insufficient information to make accurate forecasts. This lack of transparency makes it difficult for CFOs to predict future costs based on actual data and trends, increasing the likelihood of financial miscalculations.
Different SaaS Pricing Models: A Primer**
Six Steps to Effective SaaS Cost Forecasting for 2024**
1. Inventory Analysis
The first step to effective SaaS cost forecasting is conducting a comprehensive inventory analysis. This involves meticulously cataloging all current SaaS tools, licenses, and usage patterns within your organization. By creating a complete inventory, you can gain a clearer picture of your current expenditure and identify areas where efficiencies can be improved or redundancies eliminated.
However, if the inventory is prepared manually, it may quickly become outdated due to the dynamic nature of SaaS usage. New tools may be added, or usage patterns may change over time. To maintain accuracy, regular updates and monitoring of the inventory are necessary.
2. Identifying SaaS Spending Ownership
A critical part of effective SaaS cost forecasting involves identifying who within the organization owns the SaaS spend. Surprisingly, a whopping 82% of SaaS spend is owned outside of IT. This underscores the need for businesses to have clear visibility into their SaaS spend across all departments. This can be a complex task, given the decentralized nature of SaaS spending.
3. Trend Analysis
Conduct a detailed trend analysis of historical usage and expenditure to evaluate past spending and predict future costs. It helps to identify trends in cost drivers, such as seats or consumption, to understand how they influence changes in costs.
To conduct a thorough and accurate trend analysis, gather data from all possible data sources where SaaS might be hiding, including:
- SaaS invoices: these invoices detail the cost of subscriptions, usage, overage charges, and more, offering a true representation of your SaaS expenditure.
- Historical financial statements and management accounts: these serve as valuable resources. They provide a record of past spending, enabling you to see how costs have fluctuated over time and under different circumstances.
- Expense claims: employees may subscribe to SaaS tools and claim the cost as an expense. By including these in your analysis, you ensure a more comprehensive view of your organization's SaaS costs, allowing for a more accurate forecast.
4. Scaling SaaS Cost Predictions
Use your company's growth projections to make accurate scaling predictions. This collaborative effort encompasses various aspects such as:
- Headcount planning
- Product roadmap development
- Runway constraints
- New geographic expansion plans
- New go-to-market (GTM) strategies
By taking into account these factors, you can effectively estimate the software tools required for your organization's growth. This includes potential additions for new AI features, geographically constrained software like HR and payroll, and SaaS products that may need to be embedded as your customer base expands.
5. Regularly Review and Adjust
Effective SaaS cost forecasting is not a one-off activity but a continuous process that requires regular reviews and adjustments. Monthly or quarterly checks can help you fine-tune your forecasts based on actual usage and expenditure, ensuring that your predictions remain accurate and relevant. These reviews provide an opportunity to spot any discrepancies early and take corrective action promptly.
Factors CFOs should monitor during regular SaaS reviews
- Deviations from company hiring plans can create differences in SaaS costs. If there has been a significant increase or decrease in staff, it is crucial to assess the impact on SaaS usage and adjust the forecasts accordingly.
- Material changes in consumption patterns. If there are unexpected spikes or drops in usage, it may indicate a need for further analysis and adjustment of cost forecasts.
- Unbudgeted SaaS purchases. If there have been any unexpected or unauthorized purchases, use your regular checks to identify and address these to ensure accurate cost forecasting.
- Shadow IT. This refers to the use of unauthorized or unapproved SaaS applications within the organization. Identifying and addressing Shadow IT can help avoid unnecessary costs and ensure that all SaaS usage is accounted for in the forecasting process.
- Unanticipated pricing increases by SaaS vendors. If there are sudden price hikes or changes in pricing structures, it can significantly impact cost forecasts. By staying vigilant and reviewing vendor contracts and pricing regularly, CFOs can proactively identify and address any potential cost implications.
Potential SaaS Market Changes in 2024 and their Impact on Costs**
Looking ahead to 2024, several significant changes in the SaaS market could considerably impact costs.
Usage-based pricing
One key trend is the growing shift towards usage-based pricing. If this trend continues to gain traction, your SaaS costs could become more variable, closely linked to the fluctuation in usage.
This shift towards usage-based pricing may create a more flexible cost structure, potentially leading to cost reductions for companies with inconsistent SaaS usage. At the same time, it could increase costs for businesses with high usage levels. Thus, enterprises will need to closely monitor their usage patterns and implement efficient resource management practices to optimize costs in this new pricing environment.
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Inflation
The rise in global inflation is another factor likely to drive SaaS costs upward. As inflation increases operational costs for SaaS providers, these costs are likely to be passed on to customers in the form of price hikes. Businesses will need to factor these potential increases into their forecasting efforts, allowing for a certain degree of price elasticity in their budgeting.
Rise of AI
Moreover, the rise of AI is expected to have a profound impact on SaaS offerings. An increased use of AI technology in products, engineering, and GTM teams can lead to more advanced, efficient, and personalized SaaS solutions. However, the integration of AI technology also comes with its cost implications. The investment in AI development and integration could lead to higher prices for SaaS products. On the other hand, the efficiencies gained through AI could result in cost savings, offsetting some of the initial price increases.
Ten Tips for CFOs to Stay Ahead of the Curve on Budgeting for SaaS Expenditure**
Staying ahead in the SaaS landscape requires a proactive and strategic approach. As a CFO, you play a pivotal role in managing and forecasting your organization's SaaS expenditure. Here are some valuable tips to help you navigate this task effectively.
1. Build a Responsive Finance Team
A responsive finance team that handles SaaS budget approvals promptly minimizes risks and ensures controlled and accountable spending. It prevents staff members from skipping controls and resorting to purchasing SaaS on personal credit cards, a practice that only increases unbudgeted Shadow IT and risks putting critical company software infrastructure outside of the company's control environment.
2. Establish Scalable Processes
To manage your organization's SaaS purchases and renewals effectively, you need to establish scalable processes. For smaller organizations, manual tracking via spreadsheets may suffice. However, if you're scaling, consider using a full-stack SaaS Management platform like Cledara. This software enables you to streamline and automate your SaaS management, resulting in significant time and cost efficiencies, and ensuring that you have a real-time complete overview of the state of SaaS in your company.
3. Be Aware of Cultural Impact
SaaS controls can also have a negative cultural impact within your company. Many finance leaders report friction between teams due to SaaS approvals and processes. To avoid this, establish well-thought-out systems and processes that are transparent, fair, and easy to follow.
4. Prepare Ahead for Annual Budgeting
Incorporate SaaS into your annual budgeting process to ensure comprehensive and accurate financial planning. This allows for a more systematic approach to SaaS expenditure, helping to prevent unforeseen costs and maintain budget control.
5. Network with Other CFOs
Networking with CFOs from other tech companies can be a valuable source of knowledge and insights. It provides an opportunity to share experiences, learn from others' successes and challenges, and stay abreast of industry trends and best practices.
6. Use Benchmarking Tools
Platforms like Cledara offer benchmarking tools that can help you answer the question, "Am I good with SaaS?" These tools enable you to measure your performance against industry standards and identify areas for improvement.
7. Collaborate with IT
Collaborating with your IT department is crucial for maintaining a single source of truth on what's in your SaaS stack. Consider using a tool that monitors and updates it in real-time, ensuring accurate and up-to-date information.
8. Collaborate with Procurement Teams
Working closely with procurement teams can lead to better negotiation results on SaaS contracts and renewals. This collaboration can result in significant cost savings and more favorable contract terms.
9. Collaborate with HR
Aligning with HR is key to managing joiner/mover/leaver processes effectively. This collaboration ensures unnecessary SaaS seats are removed promptly, preventing wasteful spending.
10. Track Usage
Finally, establish processes to track SaaS usage. This will ensure the SaaS solutions you're paying for are used and generate a return on investment. An unused or underused SaaS solution is a drain on resources, so it's critical to monitor usage and adjust subscriptions as needed.
The Role of SaaS Management in Forecasting**
The rapidly evolving SaaS landscape presents significant challenges for businesses to navigate. Fortunately, there are purpose-built SaaS management platforms that can help address these challenges and drive operational efficiency. For CFOs and financial professionals in funded tech companies, leveraging platforms like Cledara can truly be a game-changer when it comes to accurately forecasting and managing SaaS costs.
As organizations increasingly adopt SaaS applications, platforms like Cledara become indispensable for gaining comprehensive visibility and control over SaaS spend. Cledara offers invaluable capabilities not only for accurate forecasting but also for broader IT management and finance processes. Its professional and robust features make it an essential tool in optimizing organizational efficiency and cost-effectiveness.
Streamlining Forecasting with Platforms like Cledara
Cledara, along with similar SaaS management platforms, centralizes and simplifies the entire SaaS lifecycle for businesses. From procurement to offboarding, every stage is tracked and managed in a unified dashboard. This centralization provides a holistic view of your company's SaaS stack, enabling more accurate and streamlined forecasting.
- Centralized Data: With Cledara, you have access to all the data needed to understand your historical SaaS spend. This includes information on spend, budget utilization, historical invoices, historical usage, per-seat costs, and budget owners. Having all this data in one place makes it easier to analyze trends, identify anomalies, and forecast future costs based on real, tangible data.
- Forecasting and Renewal Tracking: Cledara goes beyond historical data. It automatically tracks renewal dates and informs you of upcoming renewals in the platform. Additionally, it allows you to forecast future SaaS spend, simplifying cash flow forecasting for SaaS expenses. Stay on top of your SaaS subscriptions with Cledara!
- Real-time Data: One standout feature of Cledara is its real-time data tracking. This dynamic feature provides an instant snapshot of your SaaS spend and performance in relation to your forecast at any given moment. This level of granularity and immediacy means you have real-time insights into how your spend is tracking against projections. If discrepancies arise, you can quickly make necessary adjustments or reforecast as needed. Stay ahead of the curve with Cledara's real-time data, ensuring optimal cost management and strategic decision-making.
- Simplified Forecasting and Budgeting Collaboration: The power of Cledara lies in its ability to serve as a single source of truth for all SaaS usage in your organization. This comprehensive, bird's-eye view of your software subscriptions is accessible to all necessary departments - Finance, IT, Procurement, Executive Leadership, and even the budget owners and users themselves. With this inclusive approach, forecasting and budgeting become straightforward and efficient. The guesswork is eliminated as the data needed for decision-making is readily available, accurate, and up-to-date. This transparency and accessibility lead to better collaboration and strategic financial planning. We invite you to experience the ease and accuracy of forecasting and budgeting with Cledara.
- Leverage the Largest Dataset in the World: Cledara boasts the world's largest dataset on SaaS purchasing, usage, renewal, and churn. This robust data resource allows your organization to benchmark its performance against peers, automatically identifying anomalies and changes in vendor pricing. It's not just about observing changes; it's about discovering opportunities for savings and efficiency. With Cledara's extensive database, you can gain an unprecedented level of insight and control over your SaaS spend. Harness the power of data with Cledara to optimize your software subscriptions, streamline your budget planning, and drive cost savings.
Conclusion**
Accurately forecasting SaaS costs is a complex and critical task for CFOs of funded tech companies. Given that SaaS comprises a substantial portion of tech budgets, an incorrect forecast can have significant financial implications.
To tackle this challenge, CFOs must adopt a rigorous and data-driven approach. Conducting a comprehensive inventory analysis and thorough trend evaluation based on historical invoices, usage, and pricing lays the essential groundwork. Collaborating across departments and regularly reviewing assumptions ensures that forecasts remain relevant in the face of rapid growth and change.
Moreover, leveraging purpose-built SaaS management platforms is invaluable. Cledara's centralized data, real-time tracking, forecasting tools, and peer benchmarking capabilities streamline and enhance the forecasting process. By implementing best practices and taking advantage of advanced SaaS management technology, CFOs can effectively forecast SaaS costs and make strategic decisions that drive financial performance.
Accurate SaaS cost forecasting necessitates an ongoing and concerted effort. However, armed with the right insights, expertise, and tools, it is possible to budget confidently and optimize value, even in the midst of complexity. By prioritizing SaaS cost forecasting, CFOs can proactively manage one of the largest and most critical areas of expenditure.
