How to Build a SAAS P&L

There’s a certain drive stemming from the tech community today, and its inspiring young, bright entrepreneurs to start up shop and make a splash, if not a wave, in the ocean of apps and technology startups. You have an idea for a Software-as-a-Service (SaaS) company and a game plan for implementation, with massive growth or a buy-out as an end game in mind. The one thing you may be missing is a slight sense of business acumen, and being able to formulate a profit and loss statement (P&L) is key to reaching your aspirations. The P&L is crucial for gaining insight into the performance and profitability of a company, and is used by internal management for business analytics, financial institutions for loan financing and potential investors. By utilizing the P&L for revenue metrics, expense classification and key figures, you’ll gain much more insight than simply laying out revenues vs. expenses.


The revenue portion of a P&L represents total sales. For a SaaS company, total sales are a function of monthly subscription price and number of monthly subscriptions. This is fairly difficult to project, but can be made easier by making smaller projections of average sales prices, subscription growth rates and subscription attrition rates.

Sales Price

An important first step is to calculate or project your average sales price across your plans. Instead of taking a simple average, you will arrive at a more accurate number by determining the weighted-average subscription price based on the business make-up of your plans. Example: Let’s say you have three plans: Plan A, Plan B and Plan C. The monthly costs of each plan are $10/month, $15/month and $25/month, respectively.

Using the weighted-average approach, we arrive at an average price per plan of $13, which is significantly different than what we would have calculate using the simple average approach (i.e. ($10 + $15 + $25)/3 = $16.67).

Subscription Growth

Key to the success of any company is a strong customer base, and for a start-up, one that is growing. As our example relates to a company that sells a monthly subscription, we are looking at a revenue source that we can call Monthly Recurring Revenue (MRR). There is some debate on the topic of what a good growth rate is, but the key to remember is that your customer base must be growing on a monthly basis, and ideally in the double digits every month (~10% - 20%).

Attrition/Churn Rate

Unfortunately, customers will sometimes decide to drop your service. There could be multiple reasons for this to happen, and some of them are unavoidable. Still, having insight into the attrition/churn rate can be a great indicator for how happy your customers are with the services you’re providing for them. Attrition rate can be calculated in multiple ways, but in early stages of a start-up, it is most ideal to calculate the attrition rate using the following formula:

Example: Our company is starting the beginning of the year with a base of 1,000 customers. Assuming a 10% monthly net growth rate, we will have the following number of customers by the end of the first quarter of the year.

Now, let’s assume that at the end of Q1, we look at our actual subscription numbers. We’ve met our projections, although the net growth was made up of both growth and attrition. This is how we would calculate our monthly, quarterly and average monthly attrition rates:

So, as we can see, we met are initial growth projections, but now have more data to determine what sort of attrition we can expect moving forward.

Bringing Revenue All Together

Now that we have seen the actual first quarter subscription fluctuations, we have a basis for determining the remaining year’s subscription numbers. First, let’s determine a quarterly gross growth rate, which does not take attrition into consideration. We will use this quarterly rate as a projection for the remainder of the year.

Next, we look at attrition. We will use actual data from Q1 to determine a projected attrition rate for the remainder of the year.

Note that as we are projecting growth and attrition, we will be applying the growth and attrition rates to the beginning subscription balances to determine each quarter’s growth and attrition. The quarterly growth and attrition for the remainder of the year is as follows:

We are now ready to project revenue. Remember calculating the average sales price across our plans? We simply multiply that number by the average customer base per quarter in order to determine annualized projected revenue.

Great, we’ve gotten through the grunt work associated with calculating projected revenue! Now, it’s time to move on to expenses.


Turning to expenses, one of the most important factors from a P&L perspective is the appropriate classification of expenses. The two main categories of expenses are Costs of Goods Sold (or COGS) and Operating Expenses. Both represent different types of expenses, and are important metrics from managerial and investor points of views.

Cost of Goods Sold

While the concept of Cost of Goods Sold is fairly simple, it is an important one. It is defined as the direct costs attributable to the production and delivery of the goods or services sold by a company. As we are dealing with a SaaS company, this will generally include the following costs: hosting, cloud and database fees; support personnel and customer care costs; third-party web fees (ex. Content delivery networks, embedded software); and customer on-boarding costs.

Operating Expenses

On the other side of the calculation, the Operating Expenses are those costs incurred by a company through its normal business operations. In other words, costs which are not directly attributable to the sale or delivery of a product or service. This would generally include salaries, rent, advertising, legal & professional fees, etc. Example: Now that we have our COGS and Operating Expenses defined, let’s put together our projected expenses for the year.

We are now ready to finalize our P&L. Starting off with total revenues, we deduct total Cost of Goods Sold to determine Gross Profit. Gross Profit is the total amount of income we have to cover all remaining Operating Expenses after accounting for Cost of Goods Sold. Gross Profit less Operating Expenses will get us to Operating Income. Once we determine Operating Income, we deduct the Income Tax expense to ultimately arrive at Net Income.

Gross Margin

Another important metric used by both management and investors is the Gross Margin, which is calculated as the Gross Profit / Revenue. Gross Margin is the percentage of each sale considered as profit after accounting for Cost of Goods Sold. The remaining amount, or the margin, must be enough to cover normal operating expenses of the business. The Gross Margin in our example is as follows:

Net Income

In our example, we arrive at Net Income of $2,850, which can to be used to reinvest into the company or to be taken as profits from owners of the company. Make sure to use it wisely!