Tips to Improve Forecasting Your SaaS Company’s Monthly Recurring Revenue

June 21, 2022 3 min read

When it comes to succeeding as a SaaS CFO, few things will benefit you more than the ability to make effective forecasts. Effective reporting will always be necessary. But you should strive to take responsibility for making accurate, timely, and profitable forecasts too.

Your company’s monthly recurring revenue (MRR) is two things at once:

• One of the most critical metrics for any finance team
• One of your most helpful forecasting tools

That may sound paradoxical on the surface. But once you take a closer look, you’ll see how your MRR is simultaneously a metric and a forecasting tool.

The Pieces of Your MRR

Your MRR is a critically important metric because it’s a real-time snapshot of your company’s monthly performance. The pieces it divides into are equally important, though. They allow you to formulate more accurate predictions about your future MRR and, by extension, your quarterly and annual revenue. 

The separate components of your MRR include your: 

• Initial MRR: What level was your recurring subscription revenue at the previous month? 
• Expansion MRR: Did you bring in additional revenue from cross-sales, or existing customers upgrading their subscription tier?
• Contraction MRR: What revenue was lost from customer downgrades over the previous month?
• Churn MRR: How many customers chose to unsubscribe from your product or service over the last four weeks? 

Each of these bits of information is essential to track, analyze, and optimize. They function as real-time snapshots of your product’s performance in the marketplace. Using those snapshots to make accurate and profitable forecasts is one of the hallmarks of influential CFOs.

Now you know a bit more about your MRR, but what about the process behind forecasting?

Breaking Down the Forecasting Process

Excellent forecasting begins by streamlining and organizing your processes. The MRR components we just covered are the raw ingredients of your monthly forecasts.

Basic ingredients are necessary, but they’re not enough. You still need a recipe to follow.

Think of the following best practices as your SaaS forecasting recipe.

• Automate and centralize: To get ahead and stay ahead in the fast-paced world of the SaaS CFO, you need to leverage the power of automation. Cutting down on manual finance processes enables you to get more done in less time, more accurately than ever. Just as importantly, it puts all of your essential forecasting metrics in one central location. Everything you need is just a click away. 
• Study your pipeline: The second major component of quality forecasting involves a deep dive into your pipeline. Were there as many signups for the preceding quarter as you’d anticipated? MRR components come back into play here. Were customers flocking to a particular upgrade that you introduced? Were you losing more customers to churn than usual? This info will help guide your forecasts and allow the sales and marketing teams to see where it would be best to focus their efforts.
• Chart your sales cycles: Although SaaS sales cycles are variable (people sign up and churn at different points), it’s still helpful to study them for any patterns you can pick up. This is another instance where finance departments have a symbiotic relationship with sales and marketing teams: your research can help guide their decision-making.

There’s still one other fundamental question on your checklist, though. Have you implemented the forecasting model best suited to your company’s unique position and situation?

Adopt the Right Model for Your Company

The steps we just outlined above are essential aspects of good forecasting. But they need to be paired with the right model to be fully effective. 

The model you’ll want to adopt will depend on how established your company is, what amounts and kinds of data you have, and other factors. Below are a few of the most common.

• Lead-driven forecasting: This type of forecasting analyzes the different lead sources you have operating every month: referrals, social media, maybe email or text outreach, etc. It helps you identify and double down on your most profitable marketing channels.
• Length of sales cycle forecasting: Sales cycle forecasting examines how long it takes customers to go from the exposure stage to the conversion stage. How long does the individual deal take to close, in other words? This can help you project accurate figures for the sales team in the coming quarter and also identify stages of your sales funnel that may need improvement.
• Historical forecasting: Sometimes where you’ve been can strongly indicate where you’re likely to end up. Historical forecasting employs this logic. It works by taking past revenue data and then adding a growth percentage on top of it, based on your average AR growth and other factors. This is a quick and valuable method but may be of limited use to new companies without much data.

Don’t think of these forecasting methods as prescriptions that are set in stone. Try different approaches depending on your goals and the type of forecast you’re attempting to generate. 

Don’t Compromise on Your Forecasting 

As a SaaS CFO, you need every advantage you can get to guide your company to enhanced profitability quarter after quarter. Automated forecasting is an essential variable in that equation. Learn more about how your SaaS company can forecast better and update your board and investors.