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I’ve been sharing insights on financial trends within the B2B SaaS sector through LinkedIn posts. Now, I’m consolidating these observations into an article. These trends, ranging from gross margins to AI, are diverse and have been noted without any specific organization.

Embedded Analytics:

I believe many applications that don’t integrate seamlessly into the Enterprise Resource Planning (ERP) will struggle. AI will accelerate the trend of embedded analytics as people become more accustomed to using a single app for tasks like booking trips, expense management, etc. They’ll expect the same efficiency from their business systems and want to access dashboards, reports, and budget forms directly within their ERP/CRM/HR system rather than through third-party platforms.

Financial forecasting tools embedded within systems will emerge as winners, providing real-time, accurate forecasts directly accessible within ERP systems. You can get more accurate forecasts right in front of you, making it easy to track progress. For example, in your ERP system, you can quickly see AI predictions for future sales based on past patterns. This means you can adjust forecasts on the spot, without jumping to another tool.

Retained Earnings:

Sustained growth in retained earnings among public SaaS companies until 2024 indicated long-term success, and those companies usually didn’t give out dividends. But now, Meta‘s decision to start distributing dividends is important. I think it will impact other software companies, as investors start favoring firms that offer dividends during uncertain times, which could change how these companies manage their growth in future years.

Software companies will need to manage the relationship between dividends, retained earnings, and growth very carefully going forward.

ARR:

I believe increased investor scrutiny on Recurring in Annual Recurring Revenue (ARR) will ultimately benefit B2B software customers. Companies will be less likely to obfuscate the recurring portion, which often involves bundling managed services or other tactics to inflate ARR. Investors are realizing the expenses of Professional Services, especially as valuations squeeze, highlighting the need to accurately check margins and the protection from software’s recurring revenue. This will reduce lock-in contracts for items that should be a one-time costs. Customers can opt out of unnecessary subscriptions and accurately assess implementation costs. Moreover, companies will be less incentivized to force one-size-fits-all solutions on customers, which often lead to customer churn. The outcome will be clearer specialization: software companies will concentrate on creating software products, while professional services will specialize in their specific offerings.

Gross Margins/ COGS:

I used to tell my Solution Consultants, ‘Software is the best business in the world; you are so lucky. What other business has 80% margins.’ I was referring to gross margins without even giving a second thought about why. I explained how SaaS has economies of scale, leading to even higher gross margins over time. I emphasized that COGS, such as hosting/infrastructure, security, data storage, etc., were minimal. Having come from the on-premise world, where COGS were practically nonexistent, I also highlighted the advantages of a SaaS business—emphasizing that a high gross margin, rapid growth, and low churn can transform it into a cashflow monster as revenue compounds over time.

In 2023/2024, my sentiment would have shifted as the mindset moved from ‘growth at all costs’ to prioritizing net margins for performance. The world is shifting its focus away from gross margins to the actual net margins of these businesses, and this mindset shift will become more widespread. It will change the way we think about the software category as vendors, buyers, and investors.

Product Led Growth (PLG) and AI to improve Gross Margins/Growth:

Many startups struggle to stay afloat because growth does not solve underlying unit economic problems. Furthermore, many of these high-gross-margin companies couldn’t keep growing when they cut down on S&M, R&D, etc. The Product Led Growth (PLG) approach couldn’t decrease Sales and Marketing (S&M) costs sufficiently or increase expansion ARR quickly enough for many enterprise-focused startups.

Now, these startups face two crucial questions: 1. Can AI help them grow without hiring more people? 2. Can they use AI to replace existing employees? From my vantage point on the field, I’ve observed a significant potential in the current market to increase productivity and use fewer engineers by implementing AI. But, I’ve also noticed that there aren’t enough practical use cases for AI in Presales and Sales.

I think even many of the large, fast-growing companies will struggle in 24 as they grapple with reengineering unit metrics at scale. The result will be even more layoffs and companies either shutting down or being bought at compressed multiples. A key reason is the emphasis on gross margins rather than the overall health of the business during the past several years.

Funny finance:

“Every time you see ‘EBITDA’, substitute it with ‘bullshit’ earnings.” Charlie Munger

Public tech companies have been adding to the bullshit by tacking ‘adjusted’ in front of EBITDA. They pay in stock (SBC) and then ‘adjust’ their EBITDA, conveniently ignoring the cash aspect of compensation. This muddies the waters for investors. FAS 123 caught onto this trick, mandating companies to expense SBC on their P&L. However, compensation committees followed, approving SBC and presenting adjusted non-GAAP metrics alongside their GAAP statements. Investors leaned towards non-GAAP metrics during the market boom instead of clarifying, resulting in an overestimation of companies’ fundamentals. When the market corrected, massive layoffs ensued and public stocks lost value.

Founders celebrating valuations, especially in private companies, was a trend. Celebrating valuations over performance screams ‘cool, not competent.’ Now, the repercussions are evident as companies need to dilute their employees and navigate unrealistic valuations they previously glorified.

Summary:

I highly encourage readers to keep their finance and accounting skills sharp, as accounting is the language of business. Through writing these posts, I’m uncovering new insights into concepts that were once routine tasks.

Furthermore, I will continue to post about financial terms and then transform them into articles, refining my ability to translate finance into a qualitative approach that will aid in people’s learning. Additionally, I will continue writing about trends as it allows me to analyze and focus on the concepts from first principles.

Effective Enterprise Resource Planning (ERP) implementation is not just about getting the system up and running; it’s about laying the groundwork for comprehensive reporting and analytics. In this article, we delve into the critical aspects of early ERP reporting, debunk common excuses for neglecting this phase, and provide a framework for companies to follow during the implementation process.

Establish and Design Reporting Requirements Early:

Having worked in Corporate Performance Management (CPM) and Enterprise Resource Planning (ERP), I strongly recommend that companies think through their reporting early when implementing and selecting their ERP. I realize that requirements will likely change, but you still need an early foundation for your analytics. I would recommend creating a roadmap for metrics — ones you need now, in the next few years, given various growth scenarios. Finance should include stakeholders from other departments to design reports and think through when they will be used. Think beyond basic financial statements early in your journey to avoid a data mess later.

I’ve heard excuses for neglecting early ERP reporting, like:

1️⃣ Let’s get up and running and then figure out reporting as a phase 2. This is shortsighted as figuring out how to integrate data will be a huge pain later. In actuality, figuring out the reporting/metrics early on can help select the right ERP vendor in the first place.

2️⃣ We are growing so fast that requirements will change. This might have been true in the era of zero interest rates and easy vc funding, but now growth has to be planned with attention to the unit metrics. Thinking this through with scenarios will ensure your growth is sustainable, and you don’t end up like another Bird (scooter company).

3️⃣ We already have a BI tool with metrics that executives use. I’ve seen companies have dashboards with marketing/sales use cases, but when implementing a new ERP, executives will want this to tie back to your financial data. Think through how your existing dashboards will be improved by adding financial data. This can be integrated into the dashboards or incorporated into a structured formatted report.

4️⃣ We can always figure it out in Excel later. True, but this is so time-consuming, and as your FP&A team grows, they will all get used to Excel. Going back to a system to ensure you don’t have broken links and countless unproductive hours will be a tough feat.

5️⃣ ERP is crucial and we can figure out reporting, goal setting, and related tasks later because those are complicated. This leads to delays due to overcomplication. It’s better to start with basic Key Performance Indicators (KPIs) that match the company’s goals. Keep it simple and start. Also, choose an ERP that supports these simple reports to keep things moving without waiting.

What happens if we wait?

What often happens is companies push reporting down the road for the above or any other hundred of reasons. Then they realize their point of record system doesn’t support their reports, and they scramble to figure out a data strategy. They end up with different reporting tools, having to manage different User Interfaces. Of course, I’m not saying to expect your ERP to hold all of the data for your reporting; I’m just saying that you need to be super thoughtful about the output when selecting these systems. This will also help evaluate systems that integrate with your existing tech stack or signal a clear necessary change.

Great, now how do I even get started?

Starting your ERP journey goes beyond just setting up the system; it needs careful planning, especially for reporting. Without a clear plan, businesses may face problems later on. Here, are some practical solutions and a framework to help you begin thinking about reporting before or during you ERP implementation:

1. Everyone evaluating a new system should understand which applications you already have in inventory and the data flow. This should be everyone and not just IT. This will ensure you have holistic reports that have data across applications. You will also want to map these existing systems back to your metrics.

2. Decide the set of reports that are necessary with each phase and how you will get them. Will you need a Data Warehouse or ETL resources? If so, how much will that cost?

3. Map out, via diagrams, which systems you will have with your growth and which ones will support your executive metrics.

4. Decide how frequently and for what purpose the reports will be consumed.

5. Eliminate everything that is unnecessary. I would recommend getting a few users/executives to learn the format of an existing report rather than letting them introduce a new one.

Conclusion:

Skipping early ERP reporting can make your data messy down the road. But if companies tackle common excuses and use a smart plan, they can make sure their ERP setup not only works for today but also paves the way for growth. The secret is thinking ahead, working together, and being careful about reporting right from the start.