8 FP&A Models to Use for Financial Forecasting - Mosaic (2024)

When we ask guests on The Role Forwardwhat they wish they knew at the start of their careers, the answer is never about FP&A modeling skills.

Instead, most finance leaders say something in regards to building relationships with partners across their organizations. That, they say, is what makes the biggest difference in a finance career.

And yet, that answer assumes that your modeling skills are already on point. FP&A modeling is the foundation for all budgeting cycles that your team is responsible for. If your models are overly complex or sub-par in some way, your planning and analysis processes will suffer.

But it can be difficult to figure out where to sharpen your skills because there are so many different modeling techniques and structures. This guide will focus on some of the most important FP&A models for high-growth SaaS companies.

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What Is FP&A Modeling?

FP&A modeling is the process of building financial models to forecast performance and project the outcomes of different business situations. In practice, it’s an effort to turn real-world strategies and plans into mathematical representations so the business can understand the impact of decisions in the coming months, quarters, and years.

The type of model you build will depend entirely on the job you’re trying to get done for the business. Some of the different ways you can use models in the forecasting process include:

• Projecting revenue growth
• Assessing your SaaS valuation
• Analyzing cash flow based on vendor-level expense projections
• Scenario planning
• Headcount planning
• Understanding the impact of customer retention on growth
• Running sensitivity analysisto understand the impact of different financial assumptions

These are just a few of the ways you can use financial models to forecast business situations. But the truth is that there are near-infinite use cases. Any business decision can be translated into a financial model with the right technique, assumptions, and historical data.

8 FP&A Models to Use in SaaS

In many cases, the FP&A models you should use in SaaS are the same as any other industry. But the recurring revenue component and lack of physical inventory introduce some new models to the SaaS finance team’s toolset and make others less relevant.

If you’re leading a SaaS FP&A team, these are some of the most important models you should be using to forecast different components in your business.

1. The Three-Statement Model for Financial Planning and Analysis

The integrated 3-statement financial model is the most fundamental tool for FP&A. It blends together the income statement, balance sheet, and cash flow statement to forecast how operational decisions, financial changes, and investments impact projections for business performance.

Because the 3-statement model doesn’t get as deep into the details of operations, it’s mainly used as a high-level overview of financial performance months, quarters, and years into the future. The core assumptions you’ll need to make for this type of model are:

• Revenue growth percentage per month
• Cost of revenuepercentage per month
• Total expenses (non-cost of revenue) as a percentage of revenue per month

Once you’ve integrated the three financial statements and built out your assumptions, you should have an output that looks like the following:

While the 3-statement model is the most traditional FP&A tool, it doesn’t go deep enough to become useful to internal business partners. Use it mainly as a financial overview tool.

2. The Operating Model

Your operating model goes multiple steps beyond the traditional 3-statement model to better reflect the inner workings of the business. And because of those extra operational layers, it’s a more effective tool for driving strategic decision-making. Taylor Davidson, Founder of Foresight, does a good job breaking down the difference between traditional financial models and true operational models.

There are different ways to approach this kind of operating model, but this type of SaaS financial modelshould have four main components covered:

• The top-line plan. A representation of your go-to-market motion, including assumptions about pipeline conversions, customer growth, retention, and ACV. This is therevenue forecastingcomponent of the model.
• The headcount planner. The component of your model that includes projections of new hires for the coming months and quarters. This is critical to effective SaaS modeling because headcount is such a significant portion of overall expenses.
• The income statement planner. Where you break down the known and projected expenses for the business and make assumptions about how expenses will increase as headcount and revenue grow.
• The balance sheet planner. The component that breaks down your net working capital and cash collections, giving you an area to project one-off events for cash inflows and outflowslike, for example, an expected funding round.

This is a much more intricate model than the 3-statement model, but it’s the best way to create a financial representation of the business. Listen to Jenny Jao, Head of Finance at Sprig, talk about how she builds flexibility into her operating models for high-growth SaaS companies.

3. The Discounted Cash Flow Model

The discounted cash flow (DCF) model is a critical tool for any FP&A team gearing up for a new funding round. It’s one of the most common ways to project your valuation, using today’s cash flow generation as a way to project how much cash flow you’ll be able to generate for investors in the future.

There are two types of discounted cash flow techniques you should be aware of. Venture capitalists and investment bankers look at:

• Net present value (NPV). This approach compares your current cash inflows and outflows to determine profitability. It’s a way for investors to understand the ROI of an investment today. But for private SaaS companies, it’s more common for NPV to be represented in terms of ARR multiples.
• Internal rate of return (IRR). This approach also looks at the current value of cash inflows and outflows, but applies a discount based on what it would take to get NPV to zero.

These discounted cash flow methods are fairly complicated. And part of the problem for SaaS businesses is that they don’t necessarily account for what makes your business model truly valuable —the subscription model that drives recurring revenue and net revenue retention, the high gross margins, and lifetime value. That’s why you may rather focus on revenue multiples as a shorthand unless building out a discounted cash flow model is truly necessary.

4. The Quota Capacity Model

A quota capacity model (also known as a sales capacity model) is a top-line forecasting tool that uses historical sales rep performance, AE hiring plans, and ramp rates to forecast revenue growth.

If your go-to-market motion is heavily sales-led, this is a critical FP&A model for your business. With quota attainment for both ramped and ramping AEs, you should be able to pull the sales rep hiring plan as a lever to output financial forecasts for new bookings, billings, revenue, and collections.

Here’s how you can think about building a sales capacity model for your business.

5. The ARR Snowball Model

The ARR snowballmodel is another top-line forecasting tool. But instead of leaning on sales capacity, it uses trends in ARR data to project revenue growth. These models are broken out into new ARR, upgrade ARR, downgrade ARR, and churned ARR, using assumptions for customer growth, expansion, and churn to model out the company’s trajectory.

This model is especially useful for earlier-stage companies that haven’t yet developed high volumes of granular historical data. Even just simple, recent trends in revenue growth and acquisition costs can help you build the model. Key assumptions include ACV, new customer growth, and (potentially) known seasonality.

6. The Sales Cycle to New Bookings Model

The last top-line model we’ll highlight is the sales cycle to new bookings approach. This tool uses your average sales cycleand sales conversion ratedata to forecast new customer growth and how that drives bookings.

This is a middle ground between the quota capacity model (which is effective for companies with more established sales teams) and the ARR snowball (which can be effective for non-sales-led and earlier-stage companies. The sales cycle to new bookings model is an easier way to forecast based on earlier-stage sales functions and can help you sense-check your numbers against other modeling methods.

7. The Bookings to Revenue Waterfall Model

A bookings to revenue waterfall, also known as a SaaS revenue waterfall, is a type of financial model that maps out how booked revenue gets recognized as GAAP revenue over time.

The model uses time-based cohorts to show how total bookings waterfall out to GAAP revenue on a month-to-month basis. This is a critical tool for because it bridges the gap between top-line growth and recognized revenue, giving you a better understanding of your true growth rate.

Here’s how you can think about building a bookings to revenue waterfall model.

8. The Bookings to Cash Waterfall Model

A bookings to cash waterfall model takes the SaaS revenue waterfall a step further, forecasting how your business converts booked revenue to billings and then cash collections.

This model combines a billings waterfall that applies invoicing assumptions to your top-line forecast, showing how you expect to collect money from customer cohorts month to month.

It then takes those outputs and puts them in a cash collections waterfall to calculate how outstanding accounts receivable turn into cash flow month to month. While ARR growth is critical to business health, cash is king. This model helps you see the path from bookings growth to cash flow so you can better understand your runway.

Here’s how you can think about modeling different scenarios for sales pipeline to cash conversion.

Streamline Your Financial Modeling with Mosaic

Your team’s financial modeling (and, by extension, financial analysis) is only as effective as their ability to keep pace with business demand. Building a beautiful model doesn’t mean anything if it takes so long that the outputs you share with business partners are stale.

The problem has long been that manual data aggregation, reconciliation, and spreadsheet-based modeling can be so time-consuming that you have little time left to generate strategic insights. Your entire team — from the CFO all the way to the newest financial analyst — should be able to lean on automation to help shift the focus from low-value tasks to high-value strategic partnerships.

Mosaic’s financial modeling software integrates with your most critical source systems to create a connective tissue between all financial and operational data across your business. The result is a planning and financial forecasting platform that:

• Gives cross-functional leaders the ability to dynamically plan and get approval for new hire forecasts.
• Maximizes flexibility for top-line planning while simplifying the process of mapping out assumptions for sales quota attainment, average sale price, ACV, and more.
• Provides best practice forecasting methods to drive accuracy around expenses and margins as you manage runway and allocate resources.
• Enables a first principles approach to balance sheet forecasting so you can control the timing of cash and plan for working capital needs.

When you build your models in Mosaic, you get automated dashboards with visualizations of the model outputs so you can see the forecasted impact of your business planning process in real time.

Want to learn more about the optimizations Mosaic can bring to your modeling processes? Request a personalized demo today.

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