In October, I published this article in TechCrunch on how to tell if your SaaS startup was burning money too fast. That blog post spawned a number of great conversations with entrepreneurs on how to measure and control cash burn. The ugly truth is that startup CEOs have to walk a fine line with cash burn: spend too little and your startup may not grow fast enough to achieve escape velocity; spend too much and your startup might run out of life.
“Why don’t I just spend money to experiment and then dial back when it isn’t efficient?” – This line of thinking is perfectly logical but the simple truth is that it just isn’t very easy to cut costs without hurting employee morale, disrupting culture and killing your revenue momentum. However, given the SaaS business model, you can apply a little financial hacking to conserve cash without cutting spend.
Here are my top 5 SaaS financial hacks:
1. Focus on annual contracts and collect the cash up front.
Sales reps are naturally inclined to go for the monthly sale – it seems easier because it is a smaller commitment. That’s true, but it kills your cash flow in a couple ways: one, monthly contracts churn at a higher rate than annual; and two, monthly contracts require a long time to pay back the initial sales and marketing cost to acquire that customer. For example, let’s say your gross profit pays back customer acquisition cost in 9 months. That means you are cash flow negative on that customer for the first 9 months and you will take a permanent loss if that customer churns in that time period. Now, let’s assume you only sign annual contracts with payment up front. That same customer is immediately cash flow positive and you can never take a permanent loss because their first opportunity to churn is at the 12 month mark.
It sounds simple because it is. Incentivize your sales team to sell annual contracts and incentivize your customers through small discounts to pay upfront.
2. Implement faster and thus invoice faster and upsell faster.
“Awesome, my sales team just sold an annual contract, but where is the cash?” For most enterprise customers, you do not invoice your customer until your application is implemented and live. For customers that require integrations, training and set up time, this presents a significant delay. Improve your cash flow by compressing the time from signed contract to live deployment. Plus, you’ll get an added bonus – the faster a new customer goes live, the faster your customer success team can upsell additional features and more seats.
3. Match sales commissions to cash flow.
“Wait a second! While I’m waiting for implementation to finish, I’ve already paid out the sales commission so my cash flow is even more negative.” That’s right! That’s why forward thinking sales leaders find ways to match the timing of sales commissions to the cash flows of new contracts. There are many different ways to do this without causing too much disruption. The key is to make sure reps see the new system as fair and transparent.
4. Extend accounts payable and speed up collections of accounts receivable.
I am constantly amazed by how quickly startups pay their bills. It’s time to start thinking like a big company – maximize your float and set up your bills to be automatically paid close to their due date. More importantly, don’t let your customers borrow from you interest free for 90 days. Test the best way to improve the speed with which your customers pay you – you can discount for early payment, you can send invoices early and you can even just try using personal charm on the accountants. If a company with $6MM in revenue can bring its accounts receivable days outstanding from 90 days to 60 days, the net gain is $500K in cash.
5. Shift capital expenses to operating expenses.
Capital expenses for startups are items like office leases, furniture and computer equipment. For example, office leases may require hefty deposits or payment upfront and furniture is often purchased in advance of new hires. You can save cash by shifting these fixed expenses into monthly rentals.
SaaS startups already face an uphill battle given the business model of initial customer acquisition costs which are paid back over time by subscription revenue. Using these 5 SaaS financial hacks can conserve cash and extend your runway without reducing spend in your product or sales organizations.