EBITDA, Gross Margin, Net Profit for a SaaS company
It has been proven that over 20% of small businesses fail within their first year of work. This is mostly due to mismanagement and misunderstanding of certain key fundamentals. With our complete guide on EBITDA for a SaaS company, you’re taking a step in the right direction.
What’s a SaaS company?
SaaS companies, or Software as a Service for the long version, are basically operating online with servers on the cloud, selling software or services to their clients. The big advantage of such a company is that you can limit your costs when you decide to expand as everything, or almost everything, is virtual. Finally, these companies will generally develop, host, and update their own programs, and licensed their software on a subscription basis.
EBITDA stands for Earnings before Interest, Tax, Depreciation, and Amortization. This metric is used to calculate a company’s earnings before taking into account any of the previously mentioned factors, such as taxes and interest. This useful metric is vital since it will provide the company’s overall financial performance over a certain period of time, usually yearly or quarterly.
How to calculate EBITDA?
So, let’s say you own a company for a little more than a year, and you would like to know your EBITDA for the year to come, here’s what you need to do:
EBITDA = Operating Profit (OP) + Amortization Expense (AE) + Depreciation Expense (DE)
EBITDA = Revenues – Expenses, but excluding interest, taxes, depreciation, and amortization.
Why you should know EBITDA for your SaaS company?
Considering the nature of a SaaS company is generally functioning through the cloud, it just makes sense to take the time to calculate your EBITDA. It will allow you to analyze and better understand the profitability of your company, since you can compare the numbers to similar numbers from another company, for example.
Furthermore, you can use this metric to find the companies that have the highest ratio in a certain industry. The power of knowing the EBITDA is limitless!
What’s the meaning of COGS for a SaaS company?
This is how much your products will cost to produce for your organization. Before calculating a company’s gross margin, you will need to know your COGS, or the Cost of Goods Sold. The latter includes the materials used to create the products and the labor behind the production.
Moreover, note that it doesn’t include indirect expenses such as distribution costs or sales force costs. Needless to say, SaaS companies have production costs that differ greatly from your typical manufacturing business. Here are a few things that the COGS of a SaaS company could include:
- Software monitoring and hosting related costs
- The costs of any type of subscriptions
- Account management and customer support
- Website development and support
- Of course, the salaries for your employees involved in the production and delivery
- If you use any embedded third-party app in your software, you’ll need to include their license fees
- Data communication expenses
- Professional services and training personnel costs
How to calculate Gross Margin?
Now that you know your COGS, we can calculate the Gross Margin:
Gross Margin = Total Revenue – Cost of Goods Sold / Total Revenue
Gross Margin is a business net sales revenue (Total Revenue) after removing the COGS or Cost of Goods Sold. But how to know your net sales revenue, you may ask? The net sales are just your gross revenues minus the returns, allowances, and discounts.
If you want to calculate the Gross Margin as a percentage (%):
Gross Margin = (Total Revenue – Cost of Goods Sold) / Total Revenue x 100
Once you know the total amount of money generated by your company and your COGS, the gross margin will be useful to know how much you can retain to pay all the other costs such as debt obligations and whatnot.
How to Calculate Net Profit?
There are 3 existing formulas in order to calculate the net profit of a company:
- Net Profit = Total Revenue – Total Expenses
- Net Profit = Gross Profit – Expenses
- Net Profit Margin = Net Profit / Total Revenue x 100
The net profit is basically the remaining money after expenses deduction. These extensions include taxes, operating expenses, interest, and more. To better understand what Net Profit is, let’s have a look at an example:
Last year, your company made a total revenue of $300,000. During the same year, you got a total of $100,000 in expenses. Since net profit is total revenue minus total expenses, your net profit for that year is $200,000. Or if we actually calculate it:
$300,000 (total revenues) – $100,000 (total expenses) = $200,000 (Net Profit).
Having a successful company is difficult, yes, but if you are running a SaaS business, then you shouldn’t have such a hard time finding your crucial numbers such as your EBITDA, Gross Margin, COGS, and Net Profit. That said, running any kind of business requires a lot of dedication, but it oh so rewarding. Good luck!