MRR is a vanity metric.

The Surprisingly Complicated Math Behind Being Profitable

From the outside, making sure a business is profitable seems easy enough. Just make sure you’re earning more than you’re spending, right? Boom. Done.

But anyone who has done it (or attempted to) knows that it’s actually much more complicated, and the more money you make the more complicated it gets.

Two years ago I launched my first SaaS business, MeetEdgar, and we’ve since bootstrapped to over 3m ARR while maintaining a very healthy profit margin. Here’s how we did it!

How much runway does a bootstrapped SaaS need to have in the bank?

This is a difficult question, and the answer largely depends on your own personal risk tolerance as well as the nature of your business. A profitable SaaS does not need the traditional amount of runway because enough cash is generated every month to cover expenses (and then some). So your runway becomes more of an infinite runway as long as growth keeps outpacing churn. Please note that “as long as growth keeps outpacing churn” is not some throwaway side note, it is THE #1 priority for a profitable SaaS.

At some point I’ll write a whole other article on this point specifically, but if you’re profitable, 2–3 months’ cash in the bank can be plenty (and some of this can be kept in credit). Keep more than that and you have a lot of cash wilting away that you could have deployed to grow the business.

SaaS cash flow is not as even as you think.

Our income is pretty evenly distributed. People sign up every day of the month, so we bring in cash every day of the month. However, we do see some spikes in both income and churn due to promotions, as well as just natural variation, that can be as much as 10k/day.

Here’s a screenshot of a recent period of stripe transfers into our bank account — as you can see the numbers vary wildly! In this period we had an unusually high $57k day due to many customers renewing a yearly subscription promotion.

Our expenses can also vary dramatically month to month with larger expenses like company retreats or just yearly renewals of our most expensive tools. So although our company is profitable, we do not show a profit every single month. (This actually caused a huge obstacle when I was applying for my first mortgage and they saw my business showed “in the red” for the past few months due to paying our tax bill in that period.)

I read our monthly P&Ls with a YTD (year to date) column included, this makes it super easy to keep an eye on our profitability for the year. And I don’t know about you, but our bank balance does not zero out every December. So you also need to be aware of your numbers beyond just one year — if you had big expenses in January you might show a loss for that month, and therefore year, even though you’re still fine overall.

Think in quarters.

I like looking at our numbers quarterly to make sure we’re on track to hit our profit margin goal. You may have a loss for a month, but if you show a loss for a quarter there’s a good chance you’ve fallen off the profitable train and need to make some corrections ASAP.

MRR is a vanity metric.

When I first got into the SaaS business I thought that MRR (monthly recurring revenue) was the same as monthly cash collected, but I was DEAD wrong. I think this common misconception is a big reason why so many founders get their numbers so off.

Check out these wildly different charts generated from ProfitWell for MeetEdgar for the last two years. Let’s start with MRR:

Ah, what a lovely chart! Some differences in growth rate but a nice, even, and fairly predictable increase overall.

And now… our monthly cash collected:

Bees in the what now?? This chart has WAY more ups and downs. If you expect your actual cash collected to match your MRR, some months are going to be way off. As a profitable, bootstrapped business it really doesn’t matter to us how nice our MRR looks. What matters is actual cash collected; that’s the fuel that keeps the lights on.

So how the hell do you figure out how much you can spend?

As we’ve grown, this has become the million dollar question. How much can we afford to spend on our biggest expense, hiring, while still remaining profitable? Hiring is so tricky because you have to start the process months before you need the new team member. If you’re looking to keep up a strong rate of growth, you can’t just wait until you have a year’s salary safely tucked away in the bank before you start looking for your next engineer. It’s a chicken-and-egg problem — hiring fuels your growth, and you need growth (cash) to hire.

If you are scared of numbers, please steel yourself for the next section: you need to make a really freaking complicated forecasting spreadsheet. Unfortunately, it’s the only way to solve this problem. You must predict the cash and expenses for the rest of the year.

This spreadsheet is so complicated because this stuff is hard. You’ll need to figure out your different categories of expenses and how they change as your business grows. Here are the expense categories that we use:

• Employee expenses (this makes up 75% of our expenses)
• Fees
• Paid acquisition
• Operations
• Tools
• Culture
• Misc upcoming expenses (yes the dreaded misc category — but this one is actually really important because it’s where you throw in some of your bigger one-off expenses, like your entire dev team attending a conference together)

As you dive into this you’ll realize you have large one-time expenses like quarterly tax payments that throw off everything. That’s why it’s important to actually map out the predicted income and expenses for each month, not just use general averages.

Once you have the Giant Spreadsheet of Doom & Joy built out you can start playing with numbers — what if we hired 1 dev? How about 3? If we only hire 2, can we throw in 2 more CS reps? Can we afford them in August or not until October?

BTW I’ve never had a CFO but I assume this is what they do. At 18 people, we don’t have one so this stuff is up to me as CEO alongside our head of operations, who built out and updates the spreadsheet.

TLDR; To maintain and grow a profitable SaaS here are the rules:

1. Don’t use vanity metrics or hopeful predictions — ONLY look at cash in the bank
2. Spend less than you make — maybe not every month but definitely every quarter
3. Map out detailed predictions of how much you will collect and spend every month, and use these predictions to see what you can afford

There — those don’t sound too tricky, right? While the math involved may be complicated, the rules themselves are simple! And the benefit to your business cannot be overstated — accurately measuring your profitability and keeping it ahead of your expenses is the literal measure of whether or not your business is succeeding!

So buckle down, break out the google spreadsheet, and see just how profitable you really are.