The CTO's Financial Edge

The financial metrics that will turn you into a much more valuable leader

I am in a meeting with the CPA of our SaaS company. We're small. We just broke $2M in ARR. A far cry from the early days when the three of us had to float the company on our credit cards. Look at us now. The CEO, COO and me, the CTO of a growing tech startup.

I am however thoroughly checked out of this finance meeting. I write the code that makes this engine sing. I talk to developers. I am not interested in what the "suits" have to say about the numbers.

Until after a long pause my COO speaks up. He says, "We can't continue running the business like this". My ears perk up. What now? We just started paying ourselves a decent salary for the first time in years. So what's the issue? "We spend $1 to make a 99c pencil!", he continues. Huh? I'm scratching my head. Doing the math.

The losing-a-penny-every-time-we-sell-a-pencil part was easy to grok. But his point was that it was happening with such subtlety that no one was taking notice.

Our company was dying a slow death. Our engineering expense was consistently edging out our operating income. We were the reason our "pencils" were so expensive! And by "we" the blame really fell on me. The CTO.

I knew I was "spending money to make money". But I never realized how directly my decisions were impacting the viability of our company. I took the time to understand a few basic financial metrics.

The good news is you don't need to be a CFO to understand the most important numbers. I learned how to measure my own success as CTO by a few financial metrics. Mastering them has made me a much more valuable leader and I will walk you through them.

The financial metrics that will turn you into a much more valuable leader

That first time you perch up in your seat and ask your CEO about "Revenue Growth", or whip out a quick presentation on COGS will be the first day of the rest of your CTO life. Your value to the C-Suite will sky rocket.

I have long had a problem with CTOs turning to SaaS or Engineering metrics when doing their executive team updates. It is not that these metrics are flawed. It is just that you're bringing a Metallica album to a Tracy Chapman party.

Here is my mantra: the role of CTO is to understand how to grow a business, build the budget to spend on people that will build the technologies that will grow the business.

To be the builder of businesses, be very good at the following financial metrics.

1. Revenue Growth

Let's start with the easiest one. It is so easy in fact, that it gets neglected all the time. Be the CTO who knows the Revenue Growth.

This is simply how much more money your company makes this year compared to last year. It is usually expressed as a percentage. 

Revenue Growth = ((Current Year's Revenue - Last Year's Revenue) / Last Year's Revenue) * 100

Better to be higher: Higher revenue growth means the company is scaling and acquiring more customers or increasing sales to existing customers.

If you’re only partway through the current year, you should use the same period for comparison from the previous year (i.e., the revenue from January to September this year vs. January to September last year). This ensures an apples-to-apples comparison for YTD calculations.

As CTO, you are not directly responsible for sales, but your decisions on product quality, performance, and innovation can drastically influence how many new customers you attract—and how many stick around.

If your product is buggy and slow, good luck convincing customers to stick with you or pay more. But if it’s rock solid, customers will be happy to renew, and new ones will sign up faster.

2. Cost of Goods Sold (COGS)

COGS in a SaaS business refers to the direct costs you incur to deliver the product—things like cloud hosting, servers, customer support, and some of your engineering team's salaries. These are all the costs you can’t avoid if you want your product to run.

COGS = Direct Cost of Delivering the Product

Better to be lower: Lower COGS means it costs less to deliver your product, leaving more money for gross profit and other business activities.

Your tech decisions directly influence COGS. For example, if you’re using expensive cloud services or custom-built infrastructure that isn’t optimized, your COGS goes up.

If you’re smart about optimizing infrastructure costs, automating customer support where possible, and streamlining your stack, you can keep COGS low, and that leaves more money to reinvest in growth.

3. Gross Profit

Gross Profit tells you how much money is left after covering the direct costs of delivering your product (COGS).

Gross Profit = Revenue - COGS

Better to be higher: Higher gross profit means you’re earning more revenue after covering the direct costs of delivering your product, indicating a more profitable operation.

As CTO, understanding gross profit helps you see the financial impact of your decisions around infrastructure, hosting, and engineering costs. If gross profit is shrinking, it’s a sign that your operational or product costs are too high, and you need to optimize to maintain profitability.

3. Operating Expenses (OPEX)

While COGS covers the direct costs of delivering your product, Operating Expenses (OPEX) include everything else that keeps the lights on—things like salaries (including your R&D team), marketing, rent, and admin expenses. The trick here is to find ways to run your team efficiently while still delivering value.

Operating Income = Gross Profit - Operating Expenses

Better to be lower: Lower operating expenses mean you’re running the company efficiently, spending less on things like R&D, administration, and marketing while maintaining performance.

A lot of OPEX comes down to how you structure and manage your tech teams. Are you hiring engineers faster than you need them? Are you spending on fancy tools that no one uses? OPEX balloons when there’s inefficiency.

On the other hand, if you build a lean team, adopt automation, and spend only on what delivers the most impact, your OPEX stays manageable, and your company remains more profitable.

4. Gross Margin

Gross Margin is the percentage of revenue left after covering the cost of delivering your product (COGS). In SaaS, high gross margins are the norm, but it’s still a key indicator of how efficiently you’re running things.

Gross Margin = ((Revenue - COGS) / Revenue) * 100

Better to be higher: A higher gross margin indicates a more efficient cost structure for delivering your product. More revenue remains for other business functions like growth and reinvestment.

As CTO, a high gross margin means you’re doing a great job managing costs associated with your product—keeping cloud expenses low, minimizing downtime, and generally not wasting money.

If your gross margin starts shrinking, it’s time to figure out where costs are getting out of control.

5. Operating Margin

Operating Margin measures the percentage of revenue left after covering all operating costs, including R&D, marketing, and administrative expenses. It’s a measure of how efficiently the company is running overall.

Operating Margin = (Operating Income / Revenue) * 100

Better to be higher: A higher operating margin means the company retains more revenue after all expenses (COGS + OPEX), showing efficient operations and profitability.

Your impact on operating margin comes from managing your team’s efficiency. Do projects take too long? Are there too many cooks in the kitchen? All these things add up.

When your teams are efficient and focused on what really matters, operating margins look great. If things get bloated or mismanaged, that margin shrinks fast.

6. Break-Even Point

The break-even point is the amount of revenue your company needs to cover all its costs. After this point, every dollar contributes to profit.

Break-even Point = Fixed Costs / (Revenue per Unit - Variable Costs per Unit)

Better to be lower: A lower break-even point means you need fewer sales to cover your costs, enabling profitability to be achieved faster.

Your decisions on both COGS and OPEX impact how quickly the company hits break-even. If costs are too high—whether from inefficient infrastructure, poorly managed teams, or unnecessary spending—your break-even point moves further away, making profitability harder to reach.

Real-Life SaaS Example: $2M in Annual Recurring Revenue

Let’s look at a fictional SaaS company generating $2.1 million in annual subscription revenue. How do all these financials play out, and what does your impact as CTO look like?

Revenue Growth

Let’s say last year, the company brought in $1.8M, and this year it's at $2.1M.

Revenue Growth Calculation

((2.1M - 1.8M) / 1.8M) * 100 = 16.67%

Your product’s improvements—better features, performance, and uptime—helped boost new subscriptions and renewals, contributing to this growth.

COGS

Assume your direct costs (cloud infrastructure, support, etc.) totaled $630K.

Gross Profit

2.1M - 630K = 1.47M

Gross Margin Calculation

(1.47M / 2.1M) * 100 = 70%

A 70% gross margin is decent, but let’s say last year it was 75%. This drop means your COGS went up. You might want to look into cloud optimization or see where inefficiencies crept in.

Operating Expenses

The company’s OPEX, including your R&D team and other operational costs, is $1.1M.

Operating Income

1.47M - 1.1M = 370K

Operating Margin Calculation

(370K / 2.1M) * 100 = 17.62%

A 17.62% operating margin is respectable for a growing SaaS company. This means you’re running a relatively efficient operation, but there’s room to improve by cutting unnecessary expenses or streamlining processes.

Break-Even Point

Let’s say your fixed costs (things like rent, admin salaries, and software) are $900K, and each customer pays $50 per month ($600 per year).

Variable costs (customer support, hosting, etc.) are $150 per customer annually.

Break-Even Point Calculation

900K / (600 - 150) = 2,000 customers

So, you need 2,000 paying customers to cover all your costs and break even. If your CTO-driven decisions can lower variable costs (for instance, through better automation), you could bring this number down.

Start tracking these numbers and bring some answers to your executive meetings

Understanding these key financial metrics isn’t just the CFO’s job—it’s your job too. Every decision you make as CTO impacts how efficiently your company runs, how much it spends, and how fast it can grow. The sooner you grasp these concepts and use them to drive smarter decisions, the sooner your company—and your role within it—will thrive.

Here are some key questions a CTO might answer, along with how financial metrics can help answer them:

1. Are we running the product efficiently?

Answered by Gross Margin: If the gross margin is high, it means the CTO is effectively managing the costs of delivering the product, ensuring operational efficiency.

2. How well is our product supporting business growth?

Answered by Revenue Growth: This shows whether the product is driving customer acquisition and retention. A high revenue growth rate indicates strong alignment between the product and market needs.

3. Is our infrastructure or tech stack costing too much?

Answered by COGS: A high COGS could indicate that cloud costs, third-party tools, or other direct costs are out of control. The CTO can then focus on optimizing these areas.

4. Are we over-spending on tech or R&D?

Answered by Operating Expenses (OPEX): If OPEX is too high, the CTO may need to reassess team size, project scope, or tool usage to bring costs down and improve overall efficiency.

5. How quickly can we become profitable?

Answered by Break-Even Point: The break-even point tells the CTO how many customers are needed to cover all costs. A high break-even point suggests a need for cost reduction or more efficient scaling.

6. Are we creating enough profit to reinvest in growth?

Answered by Gross Profit and Operating Margin: These metrics indicate how much profit remains after costs. If they are high, the company has more resources to reinvest in new features, innovations, or scaling initiatives.

7. Why is our profitability shrinking?

Answered by Gross Margin: If gross margin is decreasing, it could signal rising delivery costs or inefficiencies in the product. The CTO can investigate where the increases are coming from.

As a side note, if you ever walk into your executive meeting and pull out answers to these types of questions using these financial metrics, please have a camera ready. I need to see evidience of the jaws dropping and the standing ovations. Seriously, email them to me: etienne@7ctos.com

It begins with your own spreadsheet

I know your technical brain might be fighting you right now. This isn't my job. Or this shouldn't be me. But I say embrace it! This will make you a ten times more valuable CTO in the C-Suite.

All you have to do is start tracking it. Build a simple spreadsheet that tracks these numbers. Perhaps on a quarterly basis to begin with.

I made a spreadsheet for you to get started!

Master the numbers, and you’re no longer just the tech person. You become a strategic leader who is driving both innovation and profitability.

And trust me, when you’re the person who understands the technology and how it feeds into the bottom line, you’re unstoppable!