Best practices for B2B software startups
Cost allocation - preparing your P&L for a metric-driven business model
Thomas Hannes - Reporting and compliance manager
High valuations have been made synonymous with SaaS as a result of SaaS companies’ ability to repeat processes and scale. In a segment where execution and structure is king, software startups need to maintain total mastery over their business and incorporate highly robust, metric-driven models capable of underpinning this kind of hypergrowth.
Gathering data as early as possible is vital for SaaS, and creating effective, metric-driven models requires clean sources of data, such as the P&L. Below we have shared what is, in our opinion, the best approach for cost allocation within a B2B SaaS company. While there are many accounting approaches used to assess the costs of the P&L, our work supporting successful SaaS businesses in the last twenty years has lead us to share strong opinons on how companies can allocate costs in a way that facilitates sustainable growth.
Allocating costs against departments
We frequently encounter companies that still use a traditional GAAP based model for cost allocation, as it is required for the annual accounts – and where cost allocation is based on function (e.g. salaries, rent, travel etc.). However, in working with SaaS businesses and successful founders, over time we have uncovered the benefits of allocating costs per department, rather than against particular functions.
In a company’s transition towards becoming a data-driven organisation, assigning costs to different departments is essential because it also provides the foundation for most of a SaaS company’s KPI’s.
“When I hire a sales rep in January, he will be fully ramped up in April and earn himself back every 7 months”
While you may begin by defining your departments in a way that makes sense for you, we recommend using a SaaS organisational structure, doing so will also allow you to benchmark against the market, which will provide benefits in the longer term.
Adapting to a clear structure like the one shown above, allows SaaS companies to collect data in a way that by design, informs KPIs for strategic business decisions. In our approach, we create distinct departments for cost allocation within B2B software companies, which include: • R&D • Sales and Marketing (including customer success) • General and Administration. Adapting to a clear structure like the one shown above, allows SaaS companies to collect data in a way that by design, informs KPIs for strategic business decisions.
A simplified example of differences in cost allocation
When executed properly, there are a number of consequent benefits:
• Customer acquisition cost: Adopting this approach makes it easy to distinguish between sales and marketing costs, which is essential when calculating the CAC, and which leads to greater predictability. • Benchmarking against other SaaS companies: Because cost allocation against department is adopted across the SaaS industry, finding SaaS metrics and benchmarking reports to learn from becomes easier. We find this particularly useful in guiding founders on when to invest more in development, or to invest in sales & marketing. • SaaS magic number: This is a widely used metric to measure how much ARR companies can generate with every euro in S&M spend. If every euro spent in S&M can generate >0.75 euro revenue, we know the company is ready for further investment in sales and marketing activities. After seeing first-hand the value in approaching cost allocation on a per department basis at several of our portfolio companies, we have since started to roll it out throughout our entire portfolio.