Understanding the fundamentals

Getting your financial projections right is critical as they impact numerous key stakeholders across the organization. 

CEOs and COOs are often involved in creating financial projections, and use them to guide strategic decision-making, evaluate growth plans, set targets, and allocate resources. Medium- and long-term projections in particular help executives track progress towards company goals and assess whether adjustments are needed.

Finance usually drives the financial planning exercise, and is responsible for evaluating key financial metrics, such as ARR, MRR, and churn, and conducting scenario analysis. Once the projection exercise is completed, Finance leverages financial projections to manage cash flow, budgeting, expense tracking, and overall financial health. 

Product leadership relies on financial projections to plan feature rollouts and understand how pricing strategies, customer demand, and retention will affect revenue. Furthermore, projections help Product Managers assess how development costs and timelines will impact the company’s overall financial performance.

The CMO and other marketing leaders rely heavily on financial projections to set revenue and customer acquisition targets, plan budgets, and assess campaign ROI. Projections of expected revenues and acquisition costs in particular help marketing leaders understand the cost parameters within which they need to hit their pipeline and revenue goals.

SaaS businesses face a unique set of challenges when creating financial projections. Scaling rapidly in order to meet growth targets is often par for the course, and aligning numerous priorities to a singular vision for the organization’s future can prove difficult even for the strongest leadership teams. 

Once a high-level direction has been set, functional teams face the challenge of managing revenue expectations across subscription payments and forecasting upsells and cross-sells across the existing customer base. And last, but certainly not least, projections must account for the fact that results can easily swing from best case to worst case outcomes in any given quarter, often based on just a handful of deals, making it difficult to predict results a year ahead, let alone three or five years. 

Getting financial projections right, therefore, is as much about the big picture planning—goal setting, financial modeling, and scenario analysis—as anything else. As Caitlin Haberberger, former CFO at Mezmo, suggests that “80 percent [of time] is [spent] up front and maybe 20 percent is on the actual budget.”

When to use short- and long-term projections

To create successful financial projections, you must be able to hold both a detailed view of immediate objectives as well as an aspirational view of the future. It’s therefore helpful to define financial projections for different time horizons.  

1-year financial projections

Short-term financial projections include granular information around expected revenues, operating costs, and acquisition costs and gross margin based on historical performance and immediate market conditions. Use them to inform immediate decisions related to quarterly and annual goals, hiring, and GTM strategy. 

3-year financial projections

Medium-term financial projections forecast revenues and expenses based on growth and cost assumptions over the time period. In the medium-term, it’s helpful to outline base, best, and worst-case scenarios that differ based on annual results. It’s also helpful to forecast cash flow over the time period and highlight any funding requirements. 

5-year financial projections 

Long-term financial projections communicate the business’s aspirational vision based on short- and medium-term growth assumptions. They document the broader business evolution, noting developments such as funding milestones, product expansions, and potential exit scenarios. 

Five years can feel like a lifetime in SaaS, and these long-term projections must be flexible enough to adapt to market developments and technological advancements over time.

Essential components of financial projections

Now, let’s walk through the essential components to include in your financial projections. At any point you can reference this pre-built financial projections template to start your process. 

Sales and revenue forecasts

Sales and revenue forecasts are a core element of financial projections. To map future revenues, focus on outlining businesses revenue streams, growth rate assumptions, market size, and pricing strategy.

SaaS businesses often develop multiple revenue streams. Subscription revenue from existing customers is usually the primary revenue stream, broken down into MRR and/or ARR. Additional revenue streams may include revenue from new customers, expansion or cross-sell revenue, and services fees. 

As you prepare your financial projections, document each revenue stream independently. It’s also best practice to differentiate between recurring revenue, such as subscription payments, and non-recurring revenue, such as services fees, as this makes it easier to assess revenue predictability. 

With your revenue streams identified, you can begin to make growth assumptions for each revenue stream based on historical performance. Include predictions for new customer growth, retention rates and churn, and expansion revenue growth. We recommend noting a brief justification for each growth assumption that supports your prediction, such as specific marketing initiatives, sales growth, seasonal trends, or economic factors influencing the outcome.

Any SaaS business’s ability to drive growth is dependent on market conditions. Analysis into Total Addressable Market (TAM), Market Growth Rate, and competitive landscape are important to include in your financial projections as these insights set the parameters for growth predictions. 

Finally, document your business’s pricing offerings and outline any plans to develop them. Note any discounts or promotions you plan to run in the near future and how they may impact revenue. 

Forecasting revenue can be complex, especially for high-growth SaaS companies. David Eckstein, CFO at Vanta, emphasizes the importance of starting with high-level goals and then filling in the details. Eckstein explains, “Align around two to three north star metrics. These can include company growth rate, NRR, GRR, etc. The plan should center around how to support those north star metrics responsibly.”

Operating expenses (OPEX)

Equally important to documenting anticipated revenues is outlining expected costs. SaaS businesses incur numerous operating expenses across the organization, and tracking them clearly will make it easier to understand the business’s cost structure as it scales.

First, it’s helpful to distinguish between fixed costs and variable costs. Fixed costs are costs that do not have a direct relationship with the level of production or sales. In SaaS, common fixed costs include rent, software licenses, and certain administrative expenses. Variable costs are costs that fluctuate with sales or production levels, such as customer support expenses, sales commissions, and payment processing fees, which increase as the customer base grows. In your financial projections, include a summary of fixed vs. variable costs to provide a high-level view of cost structure. For variable costs, it’s best practice to indicate the factors that drive each cost, such as user and/or revenue growth.

A specific expense to double click into in your financial projections is headcount. Project headcount by department and detail any planned hiring timelines. Note how headcount expansions will support key business initiatives—for example, hiring sales reps to increase customer acquisition. Next, detail salary compensation for each department, including base salary, estimated bonuses, and any benefit costs. When working with department leads to define headcount expansions, Eckstein offers a word of caution. “It’s important to understand hiring manager needs and have them explain rationale for why each role is critical. I often get requests for 40 headcount in a certain org. When you challenge the org leader’s assumptions, the headcount requests easily become a third of the size.”

Two expenses necessary for driving growth in SaaS are marketing expenses and R&D expenses. For marketing, project the customer acquisition costs required to attain your revenue goals. These could include costs related to digital advertising, SEO, content marketing, and/or events, depending on your company’s primary acquisition channels. R&D expense documentation should focus on infrastructure and technology costs required to deliver your service. These might include costs for cloud services, testing tools, and third-party APIs or services used in product development and maintenance.

Finally, remember to document any administrative costs that fall outside the categories noted above. These might include anticipated legal fees, accounting and audit fees, insurance, and HR expenses. 

Cash flow projections

With a clear picture of expected revenue and costs, you’re in a good place to forecast cash flow. Documenting cash flow is crucial for SaaS businesses as it helps monitor liquidity, clarify fundraising timelines, and demonstrate financial stability to investors. There are several different elements to document.

• Operating Cash Flow: Report the amount of cash generated through recurring customer payments, minus any operational expenses.
• Investment Cash Flow: Document any Capital Expenditures (CapEx) such as investments in servers, data storage, office equipment, and technology infrastructure, or any expected investments in subsidiaries or acquisitions. If you’re planning to divest certain assets or sell shares of a subsidiary, document these as cash inflows.
• Financing Cash Flow: Outline any expected equity financing rounds or debt financing agreements. If there are any outstanding loans, detail any principal or interest repayments on existing debt. 
• Working Capital Requirements: Calculate the sum of payments tied up in accounts receivable and compare with outflows for accounts payable based on payment terms with vendors, suppliers, or contractors. While inventory is usually minimal for SaaS, document any short-term liabilities like accrued expenses, prepaid expenses, or other operating costs that may impact cash flow.
• Cash Runway Calculations: Aggregate cash information from the above elements to calculate your Net Cash Flow for each period. Next, calculate your Monthly Burn Rate by summing net cash outflows in operating and investment activities. Finally, divide your Cash Balance by the Monthly Burn Rate to estimate how many months of cash runway remain. Remember to project cash runway under multiple scenarios, such as different growth rates, funding events, or expense changes, to plan for best, base, and worst cases.

Income statement projections

While most of the financial projection exercise is forward-looking, an important aspect of the process is assessing the current financial health of the business. 

Analyzing Cost of Goods Sold (COGS) reveals the expenses required to deliver your products and services. Common costs for SaaS businesses include cloud hosting and data storage costs, third-party API costs, and technical infrastructure maintenance costs.

Once you have calculated COGS, subtract it from total revenue to get Gross Margin. Gross Margin represents the amount of revenue available to cover operating expenses and contribute to profit. Gross Margin is typically higher for SaaS business than other business models, as the infrastructure investment required for every incremental customer is very low. 

Finally, EBITDA (earnings before Interest, Taxes, Depreciation, and Amortization) is a key profitability metric for SaaS companies. EBITDA indicates how well a company is managing its day-to-day operations, including core expenses such as COGS. EBITDA is often analyzed by investors as it reveals how efficiently a company is operating and how much of its earnings are attributed to operations. EBITDA should be included in financial projections as a percentage of revenue. It’s best practice to include an EBITDA projection table that shows how EBITDA evolves with revenue growth and cost structure changes. 

Balance sheet forecasting

The final component of financial projections is balance sheet forecasting. Balance sheet forecasting documents projections for assets, liabilities, equity, working capital, and debt structure, and is essential for understanding balance sheet health, liquidity, and funding needs.

First, take stock of current cash and cash equivalent assets, as well as known accounts receivable and expenses. Next, identify any known liabilities, such as accounts payable and accrued expenses. It’s best practice to treat any subscription payments made in advance until revenue is earned. 

Any projected funding events, as well as target funding amounts and timing, should also be documented as they will impact the balance sheet. ​​All long-term debt should additionally be included, as well as a detailed repayment schedule for each debt type.

Clear balance sheet forecasting will provide the business with a clear view of your financial position and resource allocation, supporting effective capital management and growth.

Using your financial projection template

To help get you started on your financial projection exercise, we’ve put together a simplified financial projection template. 

You can download the template here. 

Best practices for financial projections in 2025

There are two notable developments occurring in SaaS that will significantly impact financial planning for 2025. First, technology valuations have been upended by the end of the zero interest rate era, changing fundraising expectations for many SaaS companies. The second is the advent of the large foundation model and the widespread adoption of AI, which has led to an AI gold rush across SaaS and beyond.

Here are four recommendations for navigating those shifts as you plan your financial projections for 2025:

1. Define your place in the AI ecosystem

The AI gold rush has led every SaaS company to declare itself an AI company. But the reality is more nuanced. It’s important to identify your place in the AI ecosystem and establish growth projections accordingly. Are you planning to develop foundational models, build AI-powered products, or simply using AI to enhance operational efficiency?

2. Account for flexibility in LLM economics

If you’re in the business of building AI models, expect exponential increases in compute needs as models get larger and salaries of ML talent increase. If you’re planning on leveraging existing models through APIs, you may experience reduced API costs. We’ve already seen OpenAI’s GPT-4 32k model, for instance, saw a 67% price reduction from 2023 to 2024.

3. Set realistic churn projections in a cooling market

Carta’s reported a 60% year-over-year increase in customer bankruptcies in the Q1 2024 data. If your business is primarily serving other tech companies, you may need to adjust baseline churn rates to account for turbulence across the tech sector in recent years. 

4. Avoid unrealistic productivity expectations 

AI promises significant productivity gains across the organization, but translating these gains into financial projections can be difficult. Will the same headcount achieve higher output, or should you plan for the same output with a leaner team?

The answer will vary based on your use cases and how well your team has integrated AI into its workflows. Whatever approach you take, be careful not to project both higher productivity and lower costs, as that may lead to over-optimistic planning.

The last, and most important, step of your financial projection process is implementing a structured process for tracking progress and reporting throughout the year. Selina Guo, Head of Finance at Anrok, notes, “Regular reviews and an operating cadence allow company leaders to monitor performance, identify key variances, and make informed adjustments. This continuous feedback loop ensures that financial plans remain aligned with daily executions and can adapt to changing circumstances, enabling more agile and effective decision-making.” 

Getting your financial plan right can position your company for greater results and improved operational efficiency. By following the strategies outlined here and navigating the unique challenges of 2025, you’ll be well-equipped to create the right roadmap for your company’s future.

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