Every financial model must include a detailed breakdown of expenses over time. In this post, we will detail the expense categories that are typically included in a SaaS financial model. We also cover how to update our financial model to include additional expenses for your business.
Financial Model Expense Categories
It is helpful to categorize your business expenses into standard categories. This is helpful to understand where your money is being spent as well as useful in communicating with investors. Its expected that your ratio of spending will change as your SaaS business matures.
Typically all business expenses are broken down into the following four categories:
- General and Administrative (or G&A)
- Research and Development (or R&D)
- Sales and Marketing (or S&M)
- Cost of Goods Sold (or COGS)
General and Administrative Expenses (G&A)
General and Administrative expenses are operational expenses not attributed directly to the production of your service. For a typical SaaS startup this includes things like office space, utilities, internet, and office supplies. Also included in G&A expenses are salaries for executives, office management, human resources and any other staff outside of engineering, sales, marketing and customer success.
Research and Development Expenses (R&D)
Research and Development expenses include all staffing costs for building your SaaS service. Commonly this is the entire cost of your engineering team and all related expenses such as equipment and software licenses. For early stage, Series A SaaS startups this often represents the largest expense category. Over time sales and marketing tend to exceed R&D investment by 2-3x. You may want to benchmark your company against industry norms to determine if you’re making the right level of investment in R&D for your business.
Sales and Marketing Expenses (S&M)
Sales and Marketing expenses are important to track to understand your true costs to acquire a customer. Like R&D, Sales and Marketing expenses include staffing costs for members of the sales and marketing teams including sales commissions. Other S&M expenses include advertising spend and conference fees, basically all of the money your spending to sell your service.
Cost of Goods Sold (CoGS)
Cost of Goods Sold or simply COGS is the last category of expenses. Correctly categorizing COGS is critical to understanding your Gross Margin and Customer Lifetime Value – 2 metrics at the core of a healthy SaaS business and both important in describing your business to investors. COGS include all of the costs to operate your service including the cost of support and customer success staff. Additional Costs of Goods Sold include many of the SaaS services that you’re using internally to host or operate your service such as cloud hosting, email services, help desk software, and many more.
Customizing your SaaS Model Expenses
Adding expenses to our SaaS financial model template is an easy and straightforward process. Simply add rows to each section on the Expenses tab to cover any unaccounted costs. Ensure that any new expenses correctly categorized and that each section totals correctly. As always if you have any trouble adding your own expenses just shoot us an email and we will be happy to assist.