For most SaaS companies, the MRR, churn rate and CAC are the most important metrics to watch. However, other companies also watch the cash management metric; the MRE (Monthly Recurrent Expenditure). Why do most SaaS companies ignore the MRE and should your company be watching the metric? Read on.
The MRE (Monthly Recurring Expenditure) is also referred to as MRC (Monthly Recurring Cost) and refers to the costs that your SaaS company incurs every month in the provision of its service. Some of the expenses that will fall in the MRE include payrolls, facilities, materials, services, depreciation and other monthly operational expenditures. The MRE helps a company to determine its anticipated expenses in a given month.
For most SaaS businesses backed by venture capitalists, the MRE is not an important metric to track. This is because the businesses typical operate with “unlimited” cash raised through various rounds of funding. However, if you are bootstrapping your SaaS company, you will want to keep your eyes on the MRE during your financial analysis.
Importance of MRE for SaaS Businesses
If your company growth funds are limited, the MRE can help you know how much to spend on short-term projects without exhausting your capital for operations. By comparing the MRE and the CMRR (Committed Monthly Recurrent Revenue), you can get insight into investments that you can undertake in the short run. Using the below equation, a SaaS company can know how much to spend for a project.
CMRR – MRE = STIF
where the CMRR equals the MRR less Churn and STIF being short term investment funds.
If the STIF is greater than 1, then a company has funds for short term investment. By considering your MRE, you can efficiently use the contract revenue you get within a specific period on growth without risking getting your business cash strapped.
If your MRE is greater than your CMRR, then you will need additional funds from outside the business to maintain operations or for growth purposes. For most venture- backed SaaS companies, the STIF is less than 1 and thus any funds for growth are derived from the funding available from VCs. Any SaaS company should be looking to keep the MRE less than the CMRR.
How to Reduce the Monthly Recurring Expenditure
It is ultimately up to SaaS executives to determine how to reduce their monthly recurring costs. Companies can adopt cost-cutting measures to keep the MRE down and therefore increase the STIF. The greater the STIF available, the more a company can undertake growth initiatives, product development and overall company improvement.
Some possible ways of reducing the MRE include:
- Eliminating unnecessary expenses from the budget. For example, companies can cut down on luxurious activities such as outside team building sessions that may be contributing to the monthly recurring costs.
- Using efficient technologies to do business can reduce the MRE. Adoption of cloud based services can help a company be more efficient and reduce expensive redundancies.
- Reducing call expenditure for inbound and outbound calls and mobile voice and data contracts.
- Consolidating the supply chain to benefit from economies of scale.
- Managing document expenses through managed print services and keeping costs of servicing photocopies and printers and replenishing papers and tonners down.
For a SaaS company with venture capital dollars, the MRE may not be an important metric to keep watch on. However, for companies that are bootstrapping or that have limited funds, the MRE can be crucial to their survival as it can help founders know how much to spend on growth without putting their businesses at risk of being cash strapped.