finance

Finance — Unit Economics & Financial Models

Know your numbers. Every dollar in, every dollar out, every dollar you'll need.

Unit Economics

Metric	Formula	Healthy Range
CAC	Total acquisition spend / new customers	Depends on LTV
LTV	ARPU × gross margin × avg lifespan (months)	LTV > 3× CAC
LTV:CAC	LTV / CAC	3:1 to 5:1
Payback period	CAC / (ARPU × gross margin)	< 12 months
Gross margin	(Revenue - COGS) / Revenue	> 70% for SaaS
Net revenue retention	(Start MRR + expansion - contraction - churn) / Start MRR	> 100%
Burn multiple	Net burn / net new ARR	< 2× good, < 1× great

Rules:

• If you don't know your CAC, you don't know if your growth is profitable.
• LTV:CAC < 1 means you lose money on every customer. Stop spending.
• Payback period > 18 months = you need a lot of capital to grow.

Burn Rate & Runway

Monthly burn = monthly expenses - monthly revenue
Runway (months) = cash in bank / monthly burn

Runway	Action
18+ months	Comfortable. Invest in growth.
12-18 months	Start fundraising conversations.
6-12 months	Cut non-essential spend. Raise urgently.
< 6 months	Survival mode. Cut to break-even or close.

Track weekly: Cash balance, burn rate, revenue. No surprises.

Revenue Forecasting

Bottom-Up (Preferred)

Monthly revenue = active customers × ARPU
Customer growth = new customers - churned customers
New customers = leads × conversion rate

Top-Down (For Context Only)

TAM × achievable market share = revenue potential

Never forecast top-down to investors. They'll ask how you get there. Bottom-up shows the engine.

Pricing Math

Question	How to Answer
What should I charge?	10× the value delivered, or anchor to alternatives
Should I raise prices?	If <5% of prospects mention price as objection, yes
Free tier?	Only if virality/network effects justify it
Annual discount?	15-20% discount for annual. Improves cash flow + retention
Per-seat vs usage?	Per-seat if value scales with people. Usage if value scales with volume.

Financial Model Template

Build a 24-month model with these tabs:

Tab	Contents
Revenue	MRR by cohort, expansion, churn, net new
Costs	People, infra, tools, marketing, G&A
Headcount	By function, with start dates and salaries
Cash	Opening balance, revenue, expenses, closing balance, runway
Metrics	CAC, LTV, burn multiple, gross margin, NRR

Rules:

• Separate assumptions from calculations. Every input in one place.
• Scenario model: base, optimistic, pessimistic. Share base with investors.
• Update monthly with actuals vs forecast. Calibrate assumptions.

Common Mistakes

Mistake	Reality
Ignoring COGS	SaaS COGS = hosting + support + payment processing
Counting revenue before collection	Cash ≠ bookings ≠ revenue. Know the difference.
Hiring ahead of revenue	Every hire adds ~12 months of burn commitment
No scenario planning	"Plan for the best, model for the worst"
Forgetting payment processing fees	Stripe takes 2.9% + 30¢. At scale, this matters.