Financial Analysis

Financial Analysis

Overview

Financial analysis evaluates economic viability and business model health through metrics, projections, and benchmarking. This skill covers key financial frameworks for market and business analysis.

Required Frameworks

Trend Indicators: Load and apply the trend indicator definitions from protocols/TREND-INDICATORS.md.

Core Metrics

Unit Economics

Customer Acquisition Cost (CAC)

• Total sales & marketing spend ÷ new customers acquired
• Benchmark: Varies by industry ($50-$500+ for SaaS)

Lifetime Value (LTV)

• Average revenue per customer × gross margin × customer lifetime
• Simplified: ARPU ÷ churn rate × gross margin

LTV:CAC Ratio

• Target: 3:1 or higher
• <1:1 = unsustainable

• 5:1 = may be under-investing

Payback Period

• CAC ÷ (ARPU × gross margin)
• Target: <12 months for SaaS

Revenue Metrics

Monthly Recurring Revenue (MRR)

• Sum of all recurring subscription revenue

Annual Recurring Revenue (ARR)

• MRR × 12

Average Revenue Per User (ARPU)

• Total revenue ÷ number of customers

Net Revenue Retention (NRR)

• (Starting MRR + expansion - contraction - churn) ÷ Starting MRR
• Target: >100% (expansion exceeds churn)

Growth Metrics

Month-over-Month Growth

• (Current MRR - Previous MRR) ÷ Previous MRR

Year-over-Year Growth

• (Current ARR - Previous Year ARR) ÷ Previous Year ARR

Compound Annual Growth Rate (CAGR)

• ((End Value ÷ Start Value)^(1/years)) - 1

Revenue Models

Subscription (SaaS)

• Recurring monthly/annual payments
• Metrics: MRR, ARR, churn, NRR
• Trend: INC (dominant model)

Usage-Based

• Pay per consumption
• Metrics: Usage growth, ARPU, expansion rate
• Trend: INC (growing adoption)

Transactional

• Per-transaction fees
• Metrics: Transaction volume, take rate, AOV
• Trend: CONST

Marketplace

• Commission on GMV
• Metrics: GMV, take rate, liquidity
• Trend: CONST

Enterprise Licensing

• Large upfront + maintenance
• Metrics: Deal size, renewal rate, services %
• Trend: DEC (shifting to SaaS)

Pricing Analysis

Pricing Strategies

Pricing Power Indicators

• Strong: Price increases stick, low churn
• Moderate: Some price sensitivity, competitive pressure
• Weak: Commodity, price-driven decisions

Cost Structure Analysis

Fixed vs. Variable Costs

Gross Margin Analysis

Software/SaaS: 70-85% typical Services: 30-50% typical Marketplace: Depends on take rate

Operating Leverage

High fixed costs + low variable = High operating leverage

• Good when growing (profits scale faster)
• Risky when declining (losses amplify)

Profitability Analysis

Income Statement Ratios

Rule of 40 (SaaS)

Growth Rate % + Profit Margin % ≥ 40%

• Growing 50%? Can be -10% margin
• Growing 20%? Need 20% margin
• Below 40 = concern for investors

Financial Projections

Projection Components

1. Revenue Forecast

   • Customer growth × ARPU
   • Include expansion/contraction
   • Apply trend indicators (INC/DEC/CONST)

2. Cost Forecast

   • Fixed costs + (variable rate × revenue)
   • Step functions for scaling costs

3. Cash Flow

   • Operating cash generation
   • Capital requirements
   • Runway calculation

Scenario Modeling

Benchmarking

SaaS Benchmarks by Stage

Output Structure

## Financial Analysis Summary

### Business Model
- **Type**: [Subscription/Usage/etc.]
- **Revenue Streams**: [List]
- **Pricing Strategy**: [Type]

### Key Metrics
| Metric | Value | Benchmark | Assessment |
|--------|-------|-----------|------------|
| Gross Margin | X% | Y% | Above/Below |
| LTV:CAC | X:1 | 3:1 | Healthy/Concerning |
| NRR | X% | 100% | Strong/Weak |

### Unit Economics
- CAC: $X
- LTV: $X
- Payback: X months
- LTV:CAC: X:1

### Trend Indicators
- Revenue Growth: INC/DEC/CONST
- Margin Trajectory: INC/DEC/CONST
- Unit Economics: INC/DEC/CONST

### Financial Health Assessment
[Overall assessment with key findings]

### Projections
[3-year scenario projections]

### Recommendations
1. [Financial recommendation]
2. [Financial recommendation]

Best Practices

• Use multiple data sources for validation
• Note data recency and reliability
• Distinguish reported vs. estimated figures
• Consider industry-specific benchmarks
• Apply appropriate trend indicators

Additional Resources

For detailed templates, see:

• references/unit-economics.md - Deep dive on LTV/CAC
• references/saas-metrics.md - SaaS-specific metrics
• examples/financial-analysis.md - Sample analysis

Orchestration Hints

Confidence tiers (universal scale):

• High: 3+ independent, recent (<12mo) sources that converge
• Medium: 2 sources OR sources >12mo old OR indirect evidence
• Low: Single source, inference, or extrapolation

Dimension-specific confidence criteria below REFINE (not replace) these universal definitions.

• Cross-reference dimensions: sizing (market size validates revenue potential), competitive (competitor revenue and pricing)
• Alert triggers:
  • Unit economics infeasibility (LTV:CAC < 1)
  • Revenue model mismatch with market expectations
  • Margin compression trend threatening viability
• Confidence rules:
  • High: Public financial data (SEC filings, earnings) with 2+ quarters
  • Medium: Credible analyst estimates or partial public data
  • Low: Estimated from proxies or single data point
• Conflict detection:
  • Revenue projections vs sizing dimension's TAM/SAM figures
  • Pricing assumptions vs customer dimension's willingness-to-pay
  • Cost structure vs tech dimension's build-vs-buy analysis

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