Profitability software development

Personnel costs get bloated. Flexibility and scalability are sacrificed. And, on a budget that never seems quite adequate. Think of it as a quick primer on SaaS metrics for software engineers. Stay with us… your moment to shine is coming. Gross margin is the number most investors care about. To gain valuation, SaaS companies not only need a solid business plan in place, but also a gross margin that attracts investors. In addition to having a solid gross margin, you need positive cash flow to meet expenses.

This number gives firms a good proxy for cash flow. It can be expressed as:. SaaS companies have two ways to improve cash flow and margin. First, you can increase revenue per unit. Think: the monthly subscription price for end users. Second, you can reduce expenses, or operational costs.

However, not every SaaS company will be able to increase revenue, especially when market factors are at play. Instead, they focus on decreasing costs. To get the most impact and see more movement in both areas, most companies use a dual-pronged approach.

By simultaneously decreasing costs and increasing revenue, either through pricing or new products, you gain steadily improving margins. Technology is a vital component of modern life and has become a significant driving force for the economy.

Software development has been the fuel for this boom in technology, with a drive to produce software to support—or accelerate—our burgeoning tech needs. While the industry itself is fast-moving and complex, many of the financial challenges affecting the profitability of software development companies are fairly universal.

Below, expert tech and software development CFO, Shawn Capistrano, discusses some of the most common financial mistakes software development companies make that decrease profitability. One of the most common financial mistakes a software development company makes is underbidding projects. Accurate bidding is essential to maximizing revenues and profit margins in a software development company.

However, due to the nature of software development, actual, accurate costs are sometimes difficult to calculate. Software systems are complex and intangible, which makes actual costing more complicated than in an industry such as manufacturing or retail. How to Fix it: Get a handle on what your actual costs are. This takes detailed tracking and reporting. Not only will this provide you the data you need to more accurately bid projects, it can also show you weak areas in your processes or resources.

Maximizing profits and revenues includes improving the efficiency of your company. This means there are a huge number of small firms and a handful of large firms. BizMiner sells reports of basic financial data according to industry, so I bought five reports for corresponding to my own arbitrary definition of size as measured by annual revenue.

The table below shows how many firms are included in each of the revenue groups I selected. The percentage of total gross revenue each group accounts for has been fairly stable over the last five years. To my surprise, the BizMiner data shows the opposite of what I expected. For the revenue groups I defined, the bigger you are, the lower your margin. The profitability of firms varies by their size. This relationship has been relatively stable over the last five years.