SaaS Revenue Forecasting: How to Project Your SaaS Business Growth

Accurate revenue forecasting is an important exercise for SaaS founders. Revenue forecasting puts you in a good position to understand your business finances and project into the future.

When done right, SaaS revenue forecasting allows you to make informed decisions based on likely figures. It also helps to allocate resources efficiently, and plan ahead for sustainable SaaS growth.

In this blog post, you’ll learn about the SaaS sales forecasting model, key metrics to track, and how to create your own revenue forecast.

What Is the SaaS Sales Forecasting Model?

A SaaS forecasting model refers to a methodology you would use in a SaaS business to interpret your data and build out a revenue forecast. It’s a structured way of predicting future revenue for your SaaS based on current and historic data, including:

• Historical performance
• Conversion rates
• Customer churn
• Pipeline volume

The goal with a SaaS forecasting model is to estimate how much revenue your business will generate. This is usually over the coming months or years with accurate projections.

There are various different types of forecasting models you can use for your SaaS, such as:

• Top-down forecasting - This is where you project future business revenue based on your market size and target share.
• Bottom-up forecasting - Bottom-up forecasting requires that you start with real sales data and work up from there.
• Straight-line forecasting - This is where you would take your current revenue and use that figure to deduce what your future revenue will be. This is while operating on the assumption that your SaaS grows at a consistent rate.
• Moving averages forecasting -In the moving averages forecasting model, you would take your average performance data over a set period of time (typically monthly). This is to identify any trends according to specific SaaS metrics.
• Annual recurring revenue (ARR) forecasting - With this forecasting model, you would take a look at your ARR over a single year. Then you would project that into the future.

The model you use should depend on what stage you’re at in your business and how much historical data you have access to. While early-stage startups might opt for top-down estimates, a more established company may prefer to use bottom-down forecasts.

Key Metrics to Track for SaaS Revenue Forecasting

When forecasting revenue for your SaaS business, there are key metrics and KPIs (Key Performance Indicators) that are worth paying attention to. After all, the forecast is steeped in current and historic data, not assumptions and estimates.

MRR (Monthly Recurring Revenue)

MRR, put simply, represents the monthly income you receive from your subscribers. There are various factors that can affect your MRR. For example, how many customers ascend from free trials or freemium versions of your software to become paying customers. Plus, how much monthly churn you experience, which is to say how many customers you lose each month due to cancellations.

ARR (Annual Recurring Revenue)

Many SaaS businesses use ARR as the gold standard metric for tracking their financial health and growth because it allows them to track the activity of a customer over the course of an entire year.

Since ARR takes place over a much longer time span than MRR, this allows you to collect a lot more data for each customer. For example, you can track the rate at which customers interact with your services throughout the year. You can also track how effective cross-sells and upsells tend to be with different customer segments. Additionally, it gives you a clear idea of churn and retention rates.

Churn Rate

Your churn rate is the rate at which you lose customers through cancellations. If you have a high churn rate percentage, your revenue forecasting is going to show that you’ll lose more money over time.

This is one of the most important metrics for SaaS founders, as well as its flip side, retention. The rate at which you hold onto customers will to a large exten,t determine how much you can grow your SaaS business.

Regardless of how many new customers you can acquire in a given period, if your churn rate is high, they’ll come in one side and head out the other, leaving you in a tricky situation.

LTV (Lifetime Value)

LTV refers to how much revenue your average customer brings into the business across their entire lifespan. In other words, the amount of time they spend interacting with your business. Alongside CAC (Customer Acquisition Cost), the LTV of your business can help you to understand how scalable your business is.

If you can find ways to increase the LTV of your customer base, it will positively impact your revenue forecast as you’ll be earning more per customer in your business.

Conversion Rates

Your conversion rates give you insight into how effective your marketing and sales efforts are. For example, it’s important to track how many free trial or freemium users you convert into paying customers. This will let you know if you’re employing the right strategies and messaging to get more revenue from those using your services for free.

Conversion rate can also apply to different touchpoints in your business, and along the customer journey. You can analyze your conversion rates for each email in your welcome sequence, for example, to see where subscribers might drop off and stop opening your emails or clicking the links inside them. Plus, you can do the same for your website to find out more about what you’re doing well, and what could be improved.

Steps to Create a Revenue Forecast for a SaaS Business

Creating a revenue forecast can seem like a daunting task when you run a SaaS business. However, with a solid dataset and a robust forecasting model, the process can be relatively straightforward and highly effective.

Using Historical Data

One of the most important steps in any SaaS revenue forecast is collecting the right data from your business. In an ideal scenario, you can access all the data you need in one place with a single true data source.

However, it may be that you need to go to several software solutions, such as your CRM and sales platform, to get all the data you need for an accurate forecast.

Here’s the most important data to have on hand:

• MRR
• ARR
• Churn rate
• Conversion rates
• LTV
• CAC

Scenario Planning for Growth and Churn

Once you’ve collected all the data you need, select the right forecasting model for your SaaS business based on the data you have. For example, a bottom-up forecast using MRR and churn rate is one way to forecast your revenue.

From there, you’ll want to make sure that you’ve accounted for any variables. Variables can include churn, upsells, cross-sells, price changes, and more.

Use scenario financial planning to create best-case and worst-case scenarios for your future revenue. Consider every variable you can think of. That’s how you make a robust revenue forecast. Making a single projection based on a lot of assumptions isn’t as reliable as a forecast in which you’ve run a lot of different potential scenarios.

Ideally, you’d run these scenarios often. This way, you make sure that any new variable, like a market shift, change in customer behavior, or similar, is reflected in these scenarios.

Why Is Revenue Forecasting Critical for SaaS?

Revenue forecasting is important for SaaS businesses because it can help inform your next steps with regard to pricing strategy. It can also tell you how you can scale sustainably, and more.

For example, revenue forecasting can help make sure you don’t run into liquidity issues, which can be more common for subscription-based businesses as you often deal with deferred revenue.

Importance of Accurate Predictions

The more data and variables you bring into your revenue forecasts, the better. With accurate revenue predictions, you can build trust with stakeholders and potential investors.

Plus, you put yourself in the best position to understand when it makes sense to make new hires or initiate a new marketing campaign. You’re also better equipped to know when to focus on getting more sales. Making predictions isn’t just about finances, it’s about planning the trajectory of your business over a longer period of time.

Challenges Specific to SaaS Revenue

Unlike traditional business models, whereby you rely on repeat one-off purchases from customers and have inventory and similar issues to consider, SaaS businesses offer a different challenge.

Here are some of the key challenges unique to SaaS businesses regarding revenue:

• High churn volatility - In the SaaS business model, churn can be a constant challenge. It can feel like an ongoing struggle to keep churn rates down to increase MRR and ARR. However, a single spike in churn can dramatically alter your revenue forecast and put you on a very different path.
• Recurring vs non-recurring revenue - With a subscription-based model, you have to consider both recurring and non-recurring revenue. Recurring revenue includes subscription fees and can be tracked with MRR and ARR. Non-recurring revenue includes all one-off payments. These could include setup fees, training packages, or any consulting services you might offer.
• Long sales cycles - For certain SaaS businesses, particularly those that target large enterprise-level companies, it can be challenging to predict when you’ll close a deal. This can make forecasting more difficult.
• Inter-departmental communication - While communication in SaaS businesses isn’t necessarily that different from that of a traditional business, it can bring some unique challenges. For example, conveying thoughts around features that should be added to the software might sometimes have to go through several departments to be implemented. As a result, it might be that sometimes information falls through the cracks. Or it simply takes a while to take effect.
• Variable contract terms - With everything from discounts to billing cycles and expansion clauses, it can be tricky to keep track of your MRR. This is because it’s not always going to be the same amount from each customer every single month.

Discover Wise: The Easy Way to Manage Your SaaS Business Finances

When forecasting SaaS revenue, taking international revenue into account can be tricky. If you have a bank account, the incoming amount can depend on which exchange rate the bank uses, and what fees may be incurred.

Using a multi-currency business account can make it much easier to forecast international SaaS revenue, especially if you choose a provider with transparent fees.

Wise Business offers you an easy way to manage your business finances - whether you run a startup, small business, or enterprise-level organization. You can manage and receive payments like a local with account numbers for different currencies.

There are no hidden fees, and you can receive international payments to local account details for free. You can then exchange these payments to USD at the mid-market rate - all within one account.

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	Editor & Business Expert:
	Panna is an expert in US business finance, covering topics from invoicing to international expansion. She creates guides and reviews to help businesses save time and make informed decisions. You can read more useful business articles on her author profile.

	Author:
	Sam is a UK-based copywriter with 4+ years of experience writing for SaaS and eCommerce brands. He creates comparison guides, informative blog posts, and covers other finance-based topics.