Financial Analysis
Overview
Financial analysis evaluates economic viability and business model health through metrics, projections, and benchmarking. This skill covers key financial frameworks for market and business analysis.
Core Metrics
Unit Economics
Customer Acquisition Cost (CAC)
- Total sales & marketing spend ÷ new customers acquired
- Benchmark: Varies by industry ($50-$500+ for SaaS)
Lifetime Value (LTV)
- Average revenue per customer × gross margin × customer lifetime
- Simplified: ARPU ÷ churn rate × gross margin
LTV:CAC Ratio
- Target: 3:1 or higher
- <1:1 = unsustainable
-
5:1 = may be under-investing
Payback Period
- CAC ÷ (ARPU × gross margin)
- Target: <12 months for SaaS
Revenue Metrics
Monthly Recurring Revenue (MRR)
- Sum of all recurring subscription revenue
Annual Recurring Revenue (ARR)
- MRR × 12
Average Revenue Per User (ARPU)
- Total revenue ÷ number of customers
Net Revenue Retention (NRR)
- (Starting MRR + expansion - contraction - churn) ÷ Starting MRR
- Target: >100% (expansion exceeds churn)
Growth Metrics
Month-over-Month Growth
- (Current MRR - Previous MRR) ÷ Previous MRR
Year-over-Year Growth
- (Current ARR - Previous Year ARR) ÷ Previous Year ARR
Compound Annual Growth Rate (CAGR)
- ((End Value ÷ Start Value)^(1/years)) - 1
Revenue Models
Subscription (SaaS)
- Recurring monthly/annual payments
- Metrics: MRR, ARR, churn, NRR
- Trend: INC (dominant model)
Usage-Based
- Pay per consumption
- Metrics: Usage growth, ARPU, expansion rate
- Trend: INC (growing adoption)
Transactional
- Per-transaction fees
- Metrics: Transaction volume, take rate, AOV
- Trend: CONST
Marketplace
- Commission on GMV
- Metrics: GMV, take rate, liquidity
- Trend: CONST
Enterprise Licensing
- Large upfront + maintenance
- Metrics: Deal size, renewal rate, services %
- Trend: DEC (shifting to SaaS)
Pricing Analysis
Pricing Strategies
| Strategy | Description | Best For |
|---|---|---|
| Cost-plus | Cost + margin | Commodities |
| Value-based | % of customer value | Differentiated products |
| Competitive | Relative to alternatives | Crowded markets |
| Penetration | Low to gain share | New entrants |
| Premium | High for positioning | Luxury/enterprise |
Pricing Power Indicators
- Strong: Price increases stick, low churn
- Moderate: Some price sensitivity, competitive pressure
- Weak: Commodity, price-driven decisions
Cost Structure Analysis
Fixed vs. Variable Costs
| Cost Type | Examples | Trend Implication |
|---|---|---|
| Fixed | Rent, salaries, infrastructure | High fixed = operating leverage |
| Variable | COGS, commissions, hosting | Scales with revenue |
| Semi-variable | Support staff, marketing | Partially scales |
Gross Margin Analysis
Software/SaaS: 70-85% typical Services: 30-50% typical Marketplace: Depends on take rate
Operating Leverage
High fixed costs + low variable = High operating leverage
- Good when growing (profits scale faster)
- Risky when declining (losses amplify)
Profitability Analysis
Income Statement Ratios
| Metric | Formula | Benchmark |
|---|---|---|
| Gross Margin | (Rev - COGS) / Rev | 70%+ for SaaS |
| Operating Margin | Operating Income / Rev | 20%+ mature |
| Net Margin | Net Income / Rev | 10%+ profitable |
Rule of 40 (SaaS)
Growth Rate % + Profit Margin % ≥ 40%
- Growing 50%? Can be -10% margin
- Growing 20%? Need 20% margin
- Below 40 = concern for investors
Financial Projections
Projection Components
-
Revenue Forecast
- Customer growth × ARPU
- Include expansion/contraction
- Apply trend indicators (INC/DEC/CONST)
-
Cost Forecast
- Fixed costs + (variable rate × revenue)
- Step functions for scaling costs
-
Cash Flow
- Operating cash generation
- Capital requirements
- Runway calculation
Scenario Modeling
| Scenario | Revenue Growth | Margin | Cash Position |
|---|---|---|---|
| Bear | X% | Y% | $Z |
| Base | X% | Y% | $Z |
| Bull | X% | Y% | $Z |
Benchmarking
SaaS Benchmarks by Stage
| Metric | Early | Growth | Scale |
|---|---|---|---|
| Growth Rate | >100% | 50-100% | 20-50% |
| Gross Margin | 60%+ | 70%+ | 75%+ |
| NRR | >100% | >110% | >120% |
| LTV:CAC | >3:1 | >3:1 | >4:1 |
| Payback | <18mo | <12mo | <12mo |
Output Structure
## Financial Analysis Summary
### Business Model
- **Type**: [Subscription/Usage/etc.]
- **Revenue Streams**: [List]
- **Pricing Strategy**: [Type]
### Key Metrics
| Metric | Value | Benchmark | Assessment |
|--------|-------|-----------|------------|
| Gross Margin | X% | Y% | Above/Below |
| LTV:CAC | X:1 | 3:1 | Healthy/Concerning |
| NRR | X% | 100% | Strong/Weak |
### Unit Economics
- CAC: $X
- LTV: $X
- Payback: X months
- LTV:CAC: X:1
### Trend Indicators
- Revenue Growth: INC/DEC/CONST
- Margin Trajectory: INC/DEC/CONST
- Unit Economics: INC/DEC/CONST
### Financial Health Assessment
[Overall assessment with key findings]
### Projections
[3-year scenario projections]
### Recommendations
1. [Financial recommendation]
2. [Financial recommendation]
Best Practices
- Use multiple data sources for validation
- Note data recency and reliability
- Distinguish reported vs. estimated figures
- Consider industry-specific benchmarks
- Apply appropriate trend indicators
Additional Resources
For detailed templates, see:
references/unit-economics.md- Deep dive on LTV/CACreferences/saas-metrics.md- SaaS-specific metricsexamples/financial-analysis.md- Sample analysis