📓Key Concepts to Learn💡

1. 💼 P&L Setup for SaaS: Understanding the correct setup of Profit and Loss (P&L) statements for SaaS companies, particularly in relation to distinguishing between cost of goods sold (COGS) and operating expenses (OpEx) in the P&L.

2. 💰 Gross Margins for SaaS: Understanding the significance of gross margins for SaaS companies, and the implications of reporting high gross margins, especially when surpassing 10 million in annual recurring revenue (ARR). If you are reporting 90% GP and you are over 10M in ARR, I will question your SaaS P&L setup.

3. 📊 COGS Versus OpEx in the SaaS P&L: The importance of accurately categorizing costs as COGS or OpEx in the context of SaaS P&L statements, to ensure accurate financial reporting and management. Remember the 90% margin above? Probably wrong.

4. 🎯 Best in Class Gross Margins: Recognizing the industry standard and target benchmarks for gross margins in SaaS businesses, with a particular emphasis on aiming for 80% gross margins for pure-play SaaS.

5. 🔢 SaaS Metrics Calculations: Understanding how an accurate P&L setup and gross profit numbers are crucial inputs for various SaaS metric calculations, and the implications for effectively managing a SaaS business.

If you found this episode helpful, make sure to tune in to future episodes of SaaS Metric School to broaden your knowledge of essential SaaS metrics and finance topics.

Got any burning questions or specific metrics you'd like us to cover?

Drop us a line, and we'll do our best to address them in upcoming episodes.

Until next time, keep hustling and measuring those metrics!

Best regards,

Ben Murray
Host of SaaS Metric School

📝 Episode Recap 🎧

In this episode of SaaS Metrics School, host Ben Murray discussed the importance of setting up the profit and loss (P&L) correctly for SaaS companies. He mentioned that if a SaaS company is reporting greater than 10 million ARR and 90% gross margins, it's likely that the P&L is set up incorrectly. Ben stressed the common occurrence of this issue, especially in early-stage SaaS companies.

He highlighted that while high gross margins are common for early-stage SaaS due to minimal expenses, if a company is at scale and still reporting extraordinarily high gross margins, there might be an issue with the P&L setup. Ben shared insights from coaching clients, noting that even SaaS companies with 50 million ARR in Europe were reporting 90% gross margins, indicating P&L setup issues.

Ben emphasized the importance of correctly categorizing cost of goods sold (COGS) versus operating expenses (OpEx) on the SaaS P&L. He outlined the traditional departments that should be included in COGS for pure-play SaaS, such as tech support services, customer success, and DevOps. Ben also discussed the significance of having the correct inputs for SaaS metrics calculations, stressing the need for accurate gross profit numbers.

Listeners were encouraged to review their SaaS P&Lsetup and ensure that COGS versus OpEx are correctly categorized, and to consider aiming for 80% gross margins for best-in-class performance. Ben also directed listeners to check out specific episodes (eleven and twelve) for more in-depth understanding of COGS versus OpeX and accurate gross profit calculations.

Overall, this episode provided valuable insights into fundamental financial management for SaaS companies and emphasized the importance of accurate P&L setup and gross margin reporting.

P.S. Don't forget to subscribe to our podcast and share it with your SaaS business buddies. Together, let's conquer the world of SaaS metrics!

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