What is FinOps and How Can Your Team Start Optimizing Today?
What is FinOps and How Can Your Team Start Optimizing Today?
What is FinOps? With the constant influx of new business strategies and innovative ideas in the SaaS world today, it can be difficult to separate what’s “nice to have” and what’s “need to have.”
Perhaps you’re in the midst of revolutionizing your sales and marketing strategy, adopting a more robust privacy program, or exploring product-led growth initiatives.
All of these innovations have one thing in common: they’re designed to make your business operate smoothly and more efficiently.
Today, we want to talk about an often forgotten about aspect of SaaS business operations: finance. Often dismissed as merely “back-office,” many folks underestimate the vital importance of sound financial operations in a growing SaaS business.
Enter: FinOps. What is it? And how can your team start optimizing today? Read on to find out.
What is FinOps?
Financial Operations, or FinOps for short, is the intersection of people, process, and technology as it relates to managing the financial operations of a business. For SaaS companies specifically, this holistic approach to financial management allows for you to be flexible in your operations while also solving critical needs with a thorough process.
Here’s how the FinOps process breaks down:
- Inform: FinOps starts with people. It is designed to communicate directly with your team and your stakeholders to give visibility into your business, create shared accountability, and give an accurate view of what the company is spending, earning, and the efficiency with which you are operating.
- Optimize: Next, process. FinOps deals with the real-time capacity for decision-making, predicting, planning and purchasing. By optimizing, teams have the ability to improve workflows, uncover deep operational insights, and arrive at best practices based on company goals.
- Operate: Lastly, we add in technology. FinOps ultimately includes the tools and platforms that enable your team to get their jobs done more efficiently.
With that kind of definition, it’s easy to pull in all kinds of tools and management strategies. Think subscription management, cap table management, expense management, and sales commission for starters, then add the team who touches all of those pieces; all of that contributes to FinOps.
Why FinOps is Different for SaaS Businesses
In a SaaS business, the role of FinOps differs slightly as compared to a more traditional business model as there can be a much higher rate of volatility month over month. Because of that volatility, the FinOps team is responsible for three major components:
- Converting business transactions into financial transactions
- The financial underpinnings of the company
- The ability to plan ahead in regards to your cash runway
“With SaaS, every single month there’s an opportunity for financial volatility: early terminations, upgrades, downgrades, add-ons, and renewals are all contributors,” explains SaaSOptics Co-founder Clayton Whitfield. “Your Financial operations have to be able to handle that. They have to be able to convert those business transactions into financial transactions that properly and accurately represent the economic activity in your invoicing, GAAP/IFRS revenues, and subscription metrics.”
In addition to the above, your FinOps team needs to be able to project your future cash position. In SaaS, it’s necessary to model cash that comes from existing contracts, projected renewals (both the likelihood of renewal and the likely dollar amount), as well as new business. Equally as important as projecting your future cash position and understanding where it’s coming from is managing billing schedules. Without an accurate understanding of when that cash will be coming in the door, there’s no way for you to report on future-state financials.
FinOps Team Structure
FinOps is unique in that it is owned by the finance team, yet touches all different parts of an organization that share accountability — operations, customer service, finance, the executive team, and independent stakeholders like the Board and investors. People from different departments at different levels all play a role in FinOps when it comes to projections, revenue recognition, and A/R management.
“If you wonder what your FinOps department is, ask yourself this,” said Whitfield. “Who are the people that you asked questions about the financial health of the business during COVID-19? Who do you ask about scenario planning and re-evaluating what you need to adjust in the new reality? Who did you go to for operational insight related to financials? Those people — they’re your FinOps team.”
In short: Your FinOps team is in charge of maintaining equal levels of efficiency and flexibility to be able to change your billing, your tracking, your operational tools, and keep a finger on the pulse of your business health.
What SaaS Startups Should Know About FinOps
Now that you know more about FinOps, let’s consider some of the benefits, challenges, and need-to-know details associated with financial operations for SaaS businesses.
Benefits of Efficient FinOps
SaaS FinOps, as you’re well aware, is a whole different ball game compared to traditional business models. Because of SaaS’s volatility, Strong FinOps offers some major benefits, including real-time reporting and visibility, efficient workflows, collaborative teams, operational flexibility, optimization, and the right process at the right time.
“You want your FinOps team to have efficiency and control without sacrificing flexibility, which is key as your SaaS business evolves,” said Whitfield. “Imagine you have a bunch of older spreadsheets that you’ve been trying to string together using manual effort. The last thing you want to hear from sales is ‘Hey, we’re thinking about a new sales package. We’re going to do it like this and this and this.’ That means you’d have to go in and change your revenue spreadsheets and change your contract ledger in your spreadsheet to support any new deals and hope you don’t get your rev rec and metrics wrong when you change your formulas.”
Challenges of FinOps
In the early stages of FinOps, things often get piecemealed together, because a simple, easy fix saves time in the short run. When those quick fixes don’t get updated, they create small hiccups further down the road. What started out as a good way of doing things in spreadsheets quickly becomes broken, with lots of Bandaids to keep up the status quo, until things break. You’ve created FinOps debt. Eventually, the holes in your system become an organizational nightmare, and you have no idea how to get out of it and keep your business afloat at the same time.
Another challenge: waiting too long to switch from cash-based accounting to accrual-based accounting to be GAAP/IFRS-compliant. The longer you’re running your operations with cash, the more complicated your financials will be, and the longer it will take to make the transition.
FinOps Programs You Need to Know
Having a fundamental tech stack for FinOps on hand will help you scale your SaaS business more efficiently. Your stack should include programs that cater to cap table management, sales commissions, expense report management, sales tax management, and subscription management, like SaaSOptics. Ultimately, these solutions will take the manual processes in spreadsheets out of the equation and automate your financial processes.
FinOps vs. RevOps
A common question that comes up when discussing FinOps is: what is the difference between FinOps and RevOps or Revenue Operations? Simply put, FinOps is the intersection of people, process, and technology as it relates to managing the financial operations of a business.
FinOps focuses on properly converting business transactions into financial transactions while RevOps focuses on getting business transactions in the door.
For a deeper look at the core differences between FinOps and RevOps, check out our article, “RevOps vs. FinOps: What’s the difference & when do I need them?”
FinOps Technology Stack
There are a lot of different aspects of financial operations, and a key component of having efficient FinOps is enabling people and processes with the right technologies. Because there are so many aspects of financial operations, from revenue to expense management to cap table management, it can feel daunting to find and implement the right technologies to round out your stack.
In our “5 Must-Have FinOps Solutions,” we discuss the best FinOps solutions for different FinOps areas. These technologies are optimal for B2B SaaS companies with term subscriptions.
A FinOps Case Study: Chili Piper
Many companies have leveraged strong, efficient FinOps to their advantage, including SaaSOptics client, Chili Piper. The automated scheduling app for inbound lead conversion had a challenge to address: The team used cash-based accounting, and they needed to switch to accrual in order to accurately track ARR to present to investors.
When considering a solution, Chili Piper looked for automatic reporting that didn’t need to be maintained, integrations that made it simple to invoice customers, and integrations with Stripe and Salesforce. The FinOps solution? SaaSOptics.
“If we want to go and raise more money, SaaSOptics is incredibly useful for VC conversations,” explained Scott Haney, Chili Piper’s Manager of Operations. “VCs always ask about churn, renewal rates, etc., and all of the details they ask for are heavily woven into what SaaSOptics does.”
Streamlining FinOps with SaaSOptics
Strong FinOps are all about using processes and technology to streamline and optimize the financial operations of your business. With SaaSOptics, you can automate the subscription management aspect of your financial operations. SaaSOptics was designed with term subscription, B2B SaaS businesses in mind, so we know first hand how FinOps automation can rapidly eliminate the headache of manual processes and enable you to scale your business without increasing headcount.
Are you ready to find out how FinOps automation can help your SaaS business scale faster? Take our FinOps assessment to see how your current-state FinOps compare to other SaaS businesses and where you can make optimizations.