Three Components of SaaS Revenue Projections / Forecasts
To generate a revenue forecast, you must incorporate three distinct revenue projections from three different revenue sources:
- SaaS revenues from existing contracts
- SaaS revenue projection from renewal contracts
- Saas revenue projections from new contracts (new sales/contracts)
SaaS Optics can generate revenue schedules for all three sources. SaaS Optics is your most accurate source of projection information for existing contracts and projected renewal contracts, and is the easiest way to turn a sales forecast into a revenue forecast.
Revenues from Existing Contracts
If you have a sophisticated financial accounting system, it is likely you have a handle on the revenue schedules from existing clients. However, it’s common to see actual revenue schedules generated in a spreadsheet for internal reporting and analysis. If you rely on a spreadsheet, it is probably because its the only way of dealing with the numerous and confusing revenue recognition policies you work out with your accountants and auditors.
If you do, SaaS Optics is likely a better solution. SaaS Optics handles a wide variety of revenue recognition issues and schedules, including:
- Amortizing one-time license and set-up fees over any period, including the agreement term or a period other than the term, such as the expected average client life cycle
- Amortizing ad hoc or other professional service fees, again over any period
- Recognizing subscription services fees over the term of the agreement
- Recognizing variable subscription fees
Revenue Projection from Future Renewed Contracts/Terms
Of the three inputs, this is the most difficult to generate in a spreadsheet. SaaS Optics provides two distinct ways for you to project revenue from future renewals. You can:
- Project using contract line item specific entries
- Project using statistical projections
If you have the ability to gage the health of your existing clients, either because the number of them is manageable enough for your organization to have sufficient insight as to the individual likelihood of renewal, or you can systematically measure the usage and health of your clients using system data, you might prefer this approach. It provides the most accurate revenue forecast. With this approach, you simply add a “Projected Renewal” transaction in the transaction register, and the system will generate the appropriate revenue schedule, factoring in your configured and relevant rules for revenue recognition. And, the projection items can be added manually or using our APIs.
You can also use the statistical revenue projection capability. You can choose to project using the Customer Life Cycle Renewal Curve, which generates an aggregate revenue schedule by applying the appropriate renewal rate for each contract based on where the contract is in its term life cycle. This provides the most accurate statistical projection. Or, you can use a simple renewal rate, which while not as accurate (see the article on the problems with a simple SaaS churn rate), is excellent for what-if analysis.
Revenue Projection from New Contract (new sales/contracts)
Your sales team and CRM/SFA system will help you (to a certain degree) project new sales, but you still need to generate revenue schedules. Financial accounting systems are designed to deal with actual transactions, so again you go back to a spreadhseet.
SaaS Optics readily handles the generation of a revenue schedule, again addressing different revenue recognition methods for the components of your contracts (one time, subscriptions, ad hoc, etc.)