OpEx Spend Ratios

Every year, I review numerous SaaS P&Ls from founders. Besides the varying quality, I often notice overly optimistic forecasts.

I've trained myself to spot deviations quickly, but there's a straightforward way for investors to conduct a plausibility check: OpEx Spend Ratios!

Key Ratios:

• Sales & Marketing (S&M) as % of Revenue/ARR

• Research & Development (R&D) as % of Revenue/ARR

• General & Administrative (G&A) as % of Revenue/ARR

Here's a simple example:

This company seems to predict even stronger growth for 2025 while reducing the revenue proportion spent on S&M.

Doesn't seem very realistic. Particularly in view of the current market situation. I'd also curious to learn more about the sudden drops in G&A and R&D ratios.

Another essential metric for assessing S&M efficiency is the CAC Ratio (or "Cost of ARR"). While not a traditional OpEx Spend Ratio, it's crucial for evaluating customer acquisition efficiency.

Formula: CAC Ratio = S&M Expense / Net New ARR

There are three calculation methods:

1. Blended: New + Expansion ARR

2. New: ARR from new customers only

3. Expansion: Incremental ARR from existing customers

Ideally, choose a period matching your sales cycle length instead of calculating annually or monthly. For benchmarks, check Benchmarkit!

You can assume that savvy investors will compare your budget to:

• Your historical OpEx Spend Ratios

• Market benchmarks

I recently compared 2024 SaaS Capital Spending Benchmarks with last year's, but you could also check Meritech’s public SaaS benchmarks and other publicly available sources.

From experience, significant deviations in your budget will raise red flags or at least eyebrows.

Better conduct a plausibility check yourself before sending your financials/budget to investors and be ready with solid explanations for any outliers.