“I want milestones. I want to know in six months when we’re sitting down with the midyear plan, what would you like to have achieved? Everybody has to have a plan against which they’re executing.” Ruth Porat, Chief Financial Officer at Google.
Getting your CFO’s buy-in is crucial for more than securing budget approvals. The CFO plays a key role in shaping the company’s strategy and driving sustainable growth. So, if you can show them how your team’s efforts contribute to the company’s long-term vision, it strengthens your position and gets you their endorsement.
The best way to do this is by understanding what your CFO cares about and speaking their language. CFOs are always balancing risk and reward. So, if you can demonstrate a quick time-to-value for your initiatives or programs, that could tip the scales in your favor.
The Rule of 40 (and its limitations)
Technically, this is more of a thumb rule than a metric. But it matters to CFOs, so let’s talk about it.
The Rule of 40 was popularized around 2015 by venture capitalist Brad Feld as a benchmark to assess the financial health of SaaS companies. He wrote, “The 40% rule is that your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome… While the punchline is that you can lose money if you are growing faster, the minimum point of happiness is 40% annual growth rate.”
For nearly a decade, this rule captured the imagination of SaaS players. But its simplicity is also its biggest drawback. Because while the Rule of 40 recommends a baseline number, it doesn’t really suggest what’s the ideal way for companies to cross this. This visual from SaaS Capital illustrates the possibilities really well.
All 4 of these organizations have cleared the Rule of 40. But they are in totally different places in their journey.
- Hero: Has achieved breakeven and is growing. Nice!
- Cash Cow: Generating profits but not growing. Not attractive to investors.
- Drunken Sailor: High growth but negative profitability. Which means, it’s burning cash. Always cause for concern.
- Strip Mine: Negative growth but positive profitability. Which means, it’s profitable for now but is shrinking. Ergo, doubtful longevity.
Like all thumb rules, this one too changes based on context. For instance, the Weighted Rule of 40 gives more importance to growth than to profitability for early-stage companies. Whereas in a funding winter or slowdown, investors will focus more on profitability than on growth.
The best thing to do is to focus on what stays the same as ever. In the case of CFOs, that’s things like sustainable growth, optimized spends and high customer retention. When you talk about your initiatives or discuss budgets, have the metrics they care about at the top of your mind and the relevant data at your fingertips. This will help demonstrate how your initiatives drive the larger organizational goals.
Keeping that in mind, let's dive into the five key metrics that matter most to your CFO.
#1 Net Revenue Retention (NRR)
NRR gives a clear picture of how much revenue is retained from the existing customer base, accounting for both losses (churn, downgrades) and gains (upsells, cross-sells). NRR is a North Star metric for CFOs because it is a good indicator of:
- Long term performance: the higher your NRR, the more likely that you are strengthening your relationship with customers and the higher the chances of revenue stability and/or growth.
- Customer health and Product-Market Fit: a higher NRR means customers are expanding their use of the product, which means you have achieved PMF. If NRR comes from upsells and cross-sells, this means that your product is in tune to market needs and has high growth potential. Investors love this and so do CFOs.
- Resource allocation: NRR helps CFOs decide where to spend money. For example, if NRR is low, that means churn is high. So, investing in customer success initiatives and product development make sense.
- Financial efficiency: acquiring new customers is more expensive than holding onto your existing ones. A high NRR means you’re doing just that. Saving dollars = Happy CFOs.
#2 Gross Dollar Retention
In some ways, this metric is similar to NRR but also different because it measures different things.
In a nutshell, Gross Dollar Retention and Net Revenue Retention are complementary metrics that together provide CFOs a complete view of customer retention and revenue dynamics. One of the star features of DataviCloud that CFOs (and growth teams) love is our Retention Dashboard, where we calculate all these (real-time, if you like) and show you a snapshot.
Just click to dive deeper and see the details of the individual accounts. It’s ridiculously simple. Watch a demo.
#3 LTV to CAC Ratio
This metric indicates how efficiently you’re using your sales and marketing resources to generate long-term revenue from customers. The keyword here is long-term because LTV:CAC is all about the sustainability of your acquisition strategies over time. CFOs care about this because this ratio helps them forecast future revenues based on current acquisition strategies, which means more accurate financial planning.
It also helps prioritize resource allocation. A high ratio might justify increased spending on acquisition efforts, while a low ratio might call for an investment in customer retention and upselling. For investors too, this is a North Star metric because a high LTV:CAC Ratio indicates a profitable, scalable business with low financial risk.
The “ideal” ratio, SaaS whisperers say, is 3:1. That is, you should make at least 3x the money from a customer as you spend on acquiring them. As far as benchmarks go, this isn’t a bad one. But you have to look at the details. Specifically, this question:
How long is your customer ‘lifetime’?
Imagine if it takes 5 or 7 or 10 years to realize this lifetime value from your customer. Most SaaS businesses can’t afford to wait that long to recoup their customer acquisition costs. What you need here is additional context: revenue velocity. Which is where this next metric comes in.
#4 Pending Receivables
This is the sum of all outstanding invoices that haven’t yet been paid. Even in the SaaS industry, where billing is often automated and typically occurs on a monthly basis, there are several scenarios where receivables can still be pending. These include failed payments (declined credit card, failure of bank transfer), subscription modifications (a customer upgrades or downgrades midway during a billing cycle), manual invoicing for enterprise clients (their invoicing may not be fully automated or they may request a custom billing cycle), disputed payments, and simply, delayed payments for other reasons.
CFOs care about pending receivables because they directly impact the company's cash flow. Efficient collection of receivables ensures that the company has sufficient working capital to maintain day-to-day operations. CFOs closely monitor receivables to avoid cash shortages that could disrupt business operations.
If you have a lot of aging receivables (pending receivables categorized based on how long they’ve been outstanding), that’s a problem because it indicates issues with customer payment processes or the financial health of customers, both of which can be red flags.
Then there’s the question of the company’s financial health, which investors gauge by looking at the Days Sales Outstanding (DSO) metric, which measures the average number of days it takes for a company to collect payment after a sale has been made. A high DSO could indicate liquidity issues.
And finally, in most SaaS companies, revenue is recognized when it is earned and realizable. If receivables remain unpaid for extended periods, this can affect revenue recognition and distort financial reporting. This is something CFOs don’t want.
Getting a snapshot of your pending receivables is also seriously easy on DataviCloud. All you need to do is link your billing system and CRM. This should take just minutes with zero coding or SOS calls to your engineers. You can set up dashboards using pre-built models and set the sync frequency to your preference. And done!
See DataviCloud in action >
#5 Customer Payback Period
This calculates how long it takes for you to recover the cost of acquiring a new customer, from the revenue you get from them. Obviously, the faster this happens, the better for the business. Customer Payback Period is an indicator of how efficient your acquisition engine is, which makes it very interesting to CFOs.
Some benchmarks:
CFOs are also interested in understanding the payback period in relation to customer lifetime value (CLTV) — a favorable ratio between CLTV and payback period indicates a healthy return on investment. And once the CAC is recovered, any additional revenue from the customer contributes to the company’s profitability.
For growth-stage companies particularly, a shorter payback period means better cash flow management. This means the company can invest in growth initiatives like expanding the sales team or increasing marketing spend, without straining its financial resources.
#6 Sales Efficiency Ratio
This metric evaluates how much new ARR is generated for every dollar spent on sales and marketing. In some ways, it is similar to CAC:LTV Ratio because it too measures the efficiency of sales and marketing efforts. However, it is typically measured over a shorter period, such as a quarter or a year, providing a more immediate perspective.
Understanding this ratio helps CFOs to assess the scalability of sales efforts and determine the optimal level of spending on sales and marketing activities in the short term. Monitoring the Sales Efficiency Ratio also ensures that such expenditures are justified by the revenue they generate, contributing to better cost management and financial planning.
This metric is also of interest to investors. They use it to evaluate the potential return on investment in the company's growth strategies, a.k.a. company valuation and funding decisions.
In conclusion…
We want to say that this is by no means the ultimate list of SaaS metrics for CFOs. Nor is it meant to be. Our intent was to:
- Nudge you to put yourself into the shoes of your leadership team and look at your team’s performance through their lens.
- Shine a light on some metrics that don’t get the attention they deserve.
- Highlight how metrics always need to be looked at in relation to each other.
We’ll leave you with this reminder: CFOs are always looking at the big picture. Which means that they will appreciate (in fact, want to know) operational metrics like product adoption, user engagement, and usage patterns. The next time you approach your CFO, don’t shy away from talking about these—it’s a smart way to show them that your initiatives are not only financially sound but also practically successful!
Tired of dashboards and want some real intelligence? Hook up your systems to DataviCloud!
