Financials for Software Engineers
Understand how the money works to fund your dreams
Financials are not something most engineers want to talk about. Stick with me, though, because some of this info may help fund your dreams and keep you building cool stuff.
Key questions
How does your company or department make money?
How much money comes in on a regular basis?
How much money do you spend?
How profitable are you?
What operating conditions impact finances?
I’d love to hear in the comments what you learned. If you are already familiar with financial topics I’d like to hear what you think should be added.
How does your company or department make money?
An important place to start is: How does your company make money? Common answers might include:
Software as a Service (SaaS): Customers pay for continued use of the software. Some charge monthly or yearly subscriptions, while others charge based on usage. SaaS will be the primary focus of this article.
Perpetual Licensing: Customers pay a large sum upfront to use the software indefinitely.
Advertising: Customers use the product for free in exchange for seeing ads and having marketing data collected. The company earns revenue based on ad impressions and actions.
Time and Materials: Customers pay for workers’ time and material costs. This often includes a variable margin to cover business operations and non-billable roles. Common in consulting and creative agencies.
Cost Center: Some technology departments don’t directly generate revenue but are considered necessary business expenses. For example, a claims system at an insurance company might be supported by premium revenue.
Companies often have multiple revenue streams. For example, a free tier may display advertising, while a paid tier removes ads and unlocks features.
Further Reading
How much money comes in on a regular basis?
Understanding how much money comes in monthly or annually is a core aspect of financial literacy. These are measured as Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR).
To calculate MRR:
# of subscribers × subscription price = MRR
To calculate ARR:
MRR × 12 = ARR
Why track both?
Monthly data shows the impact of campaigns, pricing changes, or feature rollouts.
Annual data shows revenue stability.
Investors and executives use annual data for planning and valuation.
Another key metric is Customer Lifetime Value (CLTV)—how much a customer is expected to spend over their lifetime. High CLTV usually means strong retention and healthier finances.
Churn is the percentage of customers lost over a period. Think of your revenue like a bucket of water. If there’s a hole (churn), it’s hard to keep the bucket full.
Further Reading
How much money do you spend?
Technology can deliver high returns, but it also incurs significant costs. Common expenses include:
Labor (salaries, benefits, insurance)
Equipment
Cloud services
Third-party APIs
Support
All of this rolls into Cost of Goods Sold (COGS). Some software is expensive to create but cheap to maintain. Other systems, especially those with technical debt or heavy customization, are expensive to maintain long-term.
Spending money is easy—spending it wisely is not. R&D Spend as a % of Revenue (or R&D Intensity) is a useful measure of future investment vs. current needs. It signals whether a company is investing in innovation or stagnating.
Further Reading
How profitable are you?
Revenue and expenses matter because they determine what’s left: profit.
Gross Margin = Revenue – COGS
A higher margin means more buffer and sustainability.
You can go deeper with Contribution Margin, which breaks down profit by customer, product, or group—helping you understand where value comes from.
Further Reading
What operating conditions impact finances?
Engineering activities shape what technology gets delivered. Two key metrics:
Time to Market: How fast can a feature/product be launched?
Time to Value: How fast does it deliver results for users?
They sound similar but differ—launching something doesn’t mean it’s useful yet.
Delivery speed is influenced by:
Idea intake practices
Project management
Team and system structure
Code abstractions
Data and test practices
Build and deploy automation
To reduce delays: iterate, isolate failures, automate. Every unnecessary meeting, over-explained argument, or manual task adds risk and cost.
Another key metric is Support Costs per Customer, which includes customization, tech support, and bug fixing. Proactive efforts like documentation, tools, and automation reduce these costs.
SLA Compliance and Downtime measure system availability. If customers can’t use your system, why would they keep paying for it?
Further Reading
Conclusion
Key questions
How does your company or department make money?
How much money comes in on a regular basis?
How much money do you spend?
How profitable are you?
What operating conditions impact finances?
Key financial terms to understand include:
Monthly Recurring Revenue (MRR)
Annual Recurring Revenue (ARR)
Customer Lifetime Value (CLTV)
Churn
Cost of Goods Sold (COGS)
R&D Spend as a % of Revenue
Gross Margin
Contribution Margin
Time to Market
Time to Value
Support Costs per Customer
SLA Compliance and Downtime