A well-built financial model is the backbone of SaaS company planning. It connects your business assumptions to financial outcomes, helps you evaluate strategic decisions quantitatively, and provides the framework for communicating your plan to investors and the board. Yet many SaaS companies operate with models that are either too simplistic to be useful or so complex that nobody trusts or maintains them.

This walkthrough covers how to build a SaaS financial model that balances rigor with usability, structured around the components that matter most for subscription businesses.

Model Architecture

Before building any formulas, establish the architecture. A well-structured SaaS model has five core sections:

  1. Assumptions and drivers: All key inputs in one centralized location.
  2. Revenue model: Detailed build-up of recurring and non-recurring revenue.
  3. Cost model: Headcount plan plus non-headcount expenses.
  4. Three-statement output: Income statement, balance sheet, and cash flow statement.
  5. Metrics and KPIs: Calculated metrics that connect back to the assumptions.

Build each section on a separate tab or clearly delineated section. Use a consistent color-coding system: blue for inputs that can be changed, black for formulas, and green for links to other tabs. This convention is not just aesthetic—it prevents errors and makes the model auditable.

Section 1: The Assumptions Tab

The assumptions tab is the control panel of the model. Every variable that drives the financial outputs should be defined here. For a SaaS model, the critical assumptions include:

Revenue Assumptions

  • New customer additions per month (by segment if applicable)
  • Average contract value (ACV) by segment
  • Monthly churn rate by segment and by tenure
  • Expansion rate (percentage of starting MRR added through upsells per month)
  • Pricing changes (planned increases and their timing)
  • Professional services revenue per new customer (if applicable)
  • Payment terms (percentage paying monthly vs. annually, collection timing)

Cost Assumptions

  • Starting headcount by department
  • Hiring plan (new hires per month by role and department)
  • Average fully loaded cost per employee by role
  • Commission rates and structures
  • Non-headcount expenses as a percentage of revenue or as fixed amounts
  • Infrastructure cost per customer or as a percentage of revenue

Financing Assumptions

  • Current cash balance
  • Planned fundraising (amount, timing, and expected dilution)
  • Debt facilities (amounts, rates, and draw schedules)

Group these assumptions logically and label them clearly. Every assumption should have a source or rationale noted alongside it, even if it is just “management estimate.”

Section 2: The Revenue Model

The revenue model is the most important and most nuanced part of a SaaS financial model. Build it from the bottom up using a cohort-based approach.

Customer Cohort Build

For each month, track:

  1. Beginning customers: Carried forward from the prior month.
  2. New customers added: From the assumptions tab.
  3. Churned customers: Beginning customers multiplied by the churn rate.
  4. Ending customers: Beginning + new - churned.

This produces a customer count forecast that accounts for both growth and attrition.

MRR Build

Layer revenue onto the customer cohorts:

  1. New MRR: New customers multiplied by the average starting MRR per customer.
  2. Expansion MRR: Beginning MRR multiplied by the expansion rate.
  3. Churned MRR: Churned customers multiplied by their average MRR (use the cohort-specific rate, not the company average, for accuracy).
  4. Contraction MRR: Estimated as a percentage of beginning MRR.
  5. Ending MRR: Beginning MRR + new + expansion - churn - contraction.

Revenue Recognition

Convert MRR to recognized revenue. For monthly subscribers, MRR equals recognized revenue. For annual subscribers, the cash collection happens upfront but revenue is recognized ratably over twelve months. Build a revenue recognition waterfall that tracks each contract’s recognition schedule.

Non-Recurring Revenue

Model professional services and other non-recurring revenue separately. These are typically driven by new customer volume (e.g., $5,000 implementation fee per new enterprise customer) and should flow into their own revenue line.

Section 3: The Cost Model

Headcount Plan

For most SaaS companies, headcount represents 70-80% of total costs. Build a detailed headcount plan by department and role:

  • Engineering: Software engineers, QA, DevOps, engineering management.
  • Sales: Account executives, SDRs/BDRs, sales management, sales operations.
  • Marketing: Demand generation, content, product marketing, marketing operations.
  • Customer Success: CSMs, support engineers, onboarding specialists.
  • G&A: Finance, HR, legal, IT, executive team.

For each role, define the start date, fully loaded compensation (salary plus benefits plus taxes, typically 1.2x to 1.35x base salary), and any variable compensation (commissions, bonuses).

Non-Headcount Expenses

Model the major categories:

  • Hosting and infrastructure: Tie to customer count or revenue using a cost-per-unit assumption from the assumptions tab.
  • Software and tools: Start with current spend and layer in incremental tools as headcount grows.
  • Rent and facilities: Fixed costs with step-ups when the company outgrows its current space.
  • Marketing programs: Budget allocation by channel, often modeled as a percentage of ARR target.
  • Travel and entertainment: Per-employee allocation, often with different rates by department (sales travels more than engineering).
  • Professional fees: Legal, accounting, and consulting fees. These tend to step up at certain stages (e.g., when preparing for an audit or a fundraise).

COGS Allocation

Map costs into COGS and operating expense categories. This is necessary to calculate gross margin accurately within the model. Hosting, support, and DevOps personnel costs flow to COGS. Sales and marketing, R&D, and G&A are operating expenses.

Section 4: Three-Statement Output

Income Statement

Assemble the income statement from the revenue and cost models:

  • Revenue (subscription + services)
  • Cost of goods sold
  • Gross profit and gross margin
  • Operating expenses by category (S&M, R&D, G&A)
  • Operating income/loss
  • Interest and other income/expense
  • Net income/loss

Cash Flow Statement

The cash flow statement is where many SaaS models fall short. Key items to model:

  • Deferred revenue: Annual prepayments create a deferred revenue liability that unwinds as revenue is recognized. This is often a significant source of operating cash flow for SaaS companies.
  • Accounts receivable: Model based on payment terms and collection assumptions. Enterprise customers on net-30 or net-60 terms create AR balances that consume cash.
  • Capital expenditures: Primarily capitalized software development costs and equipment.
  • Financing activities: Equity raises, debt draws, and repayments.

Balance Sheet

Build the balance sheet from the cash flow statement and income statement. Key line items include cash, accounts receivable, deferred revenue (a liability), and stockholders’ equity. The balance sheet should balance in every period—if it does not, there is an error in the model.

Section 5: Metrics Dashboard

Calculate key SaaS metrics directly from the model outputs:

  • ARR and ARR growth rate
  • Net new ARR and its components
  • Gross margin (subscription and total)
  • LTV/CAC ratio (derived from CAC calculations using the cost model and new customer counts from the revenue model)
  • CAC payback period
  • Net revenue retention
  • Rule of 40 score
  • Burn rate and runway
  • Revenue per employee

Having these metrics calculated within the model ensures consistency with the underlying financials and makes it easy to see how changes in assumptions impact key performance indicators.

Best Practices for Model Maintenance

Keep It Auditable

Every cell should be traceable to either a hardcoded assumption or a clear formula. Avoid nested IF statements that span multiple lines, circular references, and hardcoded numbers buried inside formulas. If an assumption changes, there should be exactly one place to update it.

Version Control

Save dated versions of the model at key milestones (board meetings, fundraises, annual plan lock). This creates an audit trail and allows you to compare actual results against the assumptions in each version.

Actuals Integration

Each month, input actual results alongside the forecasted numbers. Build variance columns that highlight where reality diverges from the plan. Over time, this comparison calibrates your forecasting assumptions and improves accuracy.

Sensitivity Analysis

Build a sensitivity table that shows how key outputs (runway, Rule of 40 score, ARR growth) change under different assumption combinations. This transforms the model from a single-point forecast into a decision-support tool.

Final Thoughts

A financial model is only as good as the assumptions that feed it and the discipline with which it is maintained. Start with a clear architecture, build the revenue model with care, tie costs to specific drivers, and always maintain a direct connection between the assumptions tab and the outputs. The goal is not a perfect prediction of the future—it is a structured framework for thinking about the business that enables better decisions under uncertainty.