Understanding Revenue-Related Expenses Beyond COGS
An old adage claims, “you’ve got to spend money to make money.” However, for modern business leaders and investors, it’s not enough to know that their expenses are helping lead them to make money. It is important to understand exactly how much it costs to bring in a certain amount of revenue. Here is a quick rundown of revenue-related expenses, including but not limited to COGS, and how modern software can help businesses manage these business expenses more effectively.
What Are Revenue-Related Expenses?
Cost of Sales
The general definition of cost of goods sold (COGS) refers to any expense that is incurred in the production of any good or service. However, it is important for SaaS companies to understand what this means in the context of their own operation. SaaS businesses sometimes refer to this metric as cost of sales or cost of revenue to more appropriately describe its function within the industry.
For SaaS businesses, this involves direct costs incurred in the delivery and maintenance of a software service. This includes costs such as hosting, cloud costs, software licenses, and even training costs for staff who are deemed critical for the smooth running of the software.
Customer Acquisition Cost
Customer acquisition cost (CAC) is used to refer to the amount of money a business spends to acquire a new customer. This expenditure is usually calculated using the total amount of money spent on marketing and sales efforts, combined with any equipment the sales or marketing team uses, and is necessary to convert a potential customer into a paying one.
This metric is usually evaluated in comparison to the lifetime value of a customer, which refers to the amount of revenue that customers are expected to bring in over the course of their relationship with the business. This allows business leaders to evaluate the effectiveness of the CAC incurred to generate revenue for the company.
Any recurring revenue a business generates is contingent on that company’s ability to maintain effective and efficient operational activities. SaaS businesses have operating costs like any other business. Research and development, sales, marketing, and general and administrative costs all factor into a business's operating expenses. It is extremely important for business leaders to keep track of this metric, since failing to do so could mean a collapse of the entire business model, especially for early-stage SaaS businesses with limited funds.
How Modern Software Can Help Businesses Effectively Collect and Analyze Expense Data
Bridge Information Gaps Between Operational Silos to Achieve a Holistic View of Company Expenses
Most businesses use the metrics mentioned above, and many more, to measure the financial health of their business. However, the data they use to calculate those metrics might not necessarily reflect the reality of the business on the ground. Information silos are a major contributor to the lack of holistic data collection.
Executives in 75% of organizations consider information silos a barrier to knowledge sharing across departmental lines. Place’s solution helps businesses close these gaps by making it easy for operational and administrative teams to share information to a centralized source while highlighting information blindspots to business leaders.
Identify and Resolve Discrepancies in Financial Data in a Timely Manner
Financial data and the insights they deliver can have a significant impact on the strategic decision-making at every level of a business. This decision-making can only be done when business leaders trust their data and consider it to have high quality and reliability. However, maintaining high data quality and reliability can be difficult for data teams to do manually. AI-powered software can assist business leaders in their decision-making by ensuring that the financial data that they are using is free of discrepancies or inaccuracies in real-time.
Increase Operational Efficiency by Automating Repetitive but Critical Processes
Apart from the benefits software provides in ensuring high-quality data and empowering business leaders to make data-driven decisions, the right digital solution can also increase the efficiency of existing financial teams. Finance teams have to build and facilitate numerous processes that are crucial for regular operations. These tasks can be highly resource-intensive if done manually. As a result, automation is the key driver for approximately half of organizations embarking on digital transformation journeys.
Simplify Reporting With Intelligently Generated Reports and Intuitive User Interfaces
SaaS businesses, like any other, rely on consistent and effective reporting to ensure they are on track to meet their business objectives. This is even more important for early-stage SaaS companies who have to deliver financial and operational data to their investors using specific metrics. Modern software can deliver this insight in record time. AI can help businesses automatically generate reports with the latest data available to them and display this information in a way that is intuitive and easy to understand.
Improve Compliance Standards by Automatically Creating Audit Trails and Categorizing Business Expenses
Historical data is valuable to a variety of internal and external stakeholders. Investors, employees, and business leaders use this information to gauge business performance over a given period of time while regulatory bodies use this information to ensure compliance with state and federal laws. Consolidated and easily accessible data can make it easy for business leaders to ensure that they are complying with these laws and present proof of this compliance to the authorities when needed.
How Place’s Solution Delivers Insight Into Business Expenses Beyond COGS for SaaS Companies
Effectively managing expenses is a core skill that every business leader must have to ensure the longevity of their operation. However, between all the responsibilities that finance teams and business leaders must undertake, it can be easy to let standards slip and ignore important expense-tracking processes.
Place can help finance teams automate SaaS metrics collection, calculations, and presentation by providing a fully-integrated analytics hub that enables greater transparency, visibility, and efficiency.
To find out how Place can help SaaS businesses gain deeper insight into business performance metrics and analytics, schedule a demo with us today.