Managing Cash in SaaS through Economic Uncertainty

Ed Byrne
Ed Byrne
Jun 24 · 6 min read

Originally published in Protocol

Let’s not underplay the current situation — we are in crisis mode. Not because we’re heading towards a recession, not because SaaS companies might shrink, but because of all the unknown unknowns. Fear causes irrationality so SaaS CEOs must demonstrate reasoned leadership, making decisions that protect the business, and the team, for the short and long-term.

Remember — long-term thinking is good. But not if you don’t exist. On the other side — too much short-term thinking is bad — because there won’t be a long-term if you take too many steps backwards.

I hate to over-use our favorite phrase, but now really is a time to exercise ‘common sense’.

In this post I’m going to focus on finance management — and mostly on cash. A lot of SaaS founders have never had to deal with a cash crunch — VC funds, growth, and high margins have made cash a given. But now CEOs must embrace the phrase ‘CASH is KING’ and dive into understanding the inflows, outflows, timing, forecasting, and scenario planning.

Let’s start with the positives

Recurring revenue is a gift. In SaaS, we are so lucky to have a business model that self-regenerates. Most businesses have to work for every single sale, or for every hour of billable work. We are in a great space.

The ability to work from home is a gift. Many cannot. SaaS businesses can continue to sell, support, and work on the product with low operational impact in a distributed manner, even if it’s not forever.

High margin is a gift. It means we have levers to pull. High-margin businesses tend to be a little fat around the edges, because they can tolerate inefficient spend in ways low-margin companies couldn’t dream of. If 80 cents of every dollar in revenue you generate is available for after-cost-of-sale expenses, you have a lot of room to make changes. Imagine you generated $10m a year and only had $1–2m to run the entire business? This is the reality for many companies!

Quick Mental Alignment

Here’s the page I’m on: don’t bury your head in the sand. This is not business as usual — most likely your business is going to experience cash, collections, and total revenue issues over the next few months.

In times like these, I think it’s better to over-react than to under-react. If you over-react, you might end up discovering you were too conservative — but you know what, you’ll do that from a your desk where you’re running a business that still exists. If you under-react you won’t get to think long-term. The common sense balance is this — think long term, but remember there won’t be a long term if you don’t make it through the short-term.

What follows is all just basic financial advice — I’m not an accountant, but I’ve run a few SaaS companies and sit on the board of a few too — this is the advice I am giving our CEOs. The reason I’m writing it is that I’ve observed — and experienced — that for SaaS companies, growth trumps efficiency. In fact I think I’ve said this at board meetings — you can’t be focussed on growth and penny-pinch at the same time. Pick one. Well — now is the time to pick the latter, and the good news is the growth focus has likely created lots of inefficiencies that are low-hanging fruit ways to save some dollars.

This is a positive exercise — getting on top of your finances, in particular your cash flows, in a level of detail you never had to before, is a great skill to build and you’ll use it the rest of your business career — as an operator and advisor.

Cash Management Plan

Cash On Hand: Do you know how much cash is in the bank right now? Do you know how much was there yesterday and the day before; and what’ll be there tomorrow? Do you know what money in on it’s way in and out?

When cash-in is likely to be substantially slowed-down, you need to be 100% aware of your cash balance — the likelihood of getting an overdraft facility from the bank is low — so you simply cannot run close to zero — no matter what.

Accounts Receivable (AR): This is going to be an indicator of future cash flows so watch the trend in this number. I would make a list of all customers in AR, and as well as aging them by 0–30 day, 30–90 day, 90 days +, I would add columns for ‘likeliness to pay’, ‘communicating (yes/no)’ , and ‘expected date of payment (if any)’. And then build that into an ‘AR to Cash’ forecast for the next 6 months.

Your Profit & Loss might say you’re profitable — but if your AR is high, aging, and increasing, you’re probably burning through a lot of cash. You probably have customers ringing in looking for a deferral of their payments — this all goes to AR too even though top line revenue in not impacted.

Managing AR now is crucial — don’t delegate this only to your accountants — Customer Success should be helping (especially on the soft factors like ‘likeliness to pay’) and if have sales people that aren’t as busy selling right now, they can help too.

Deferred Revenue (DR): In the context of running the business with a cash flow mindset, deferred revenue — and a deferred revenue forecast — are important. Remember — deferred revenue is money you have already collected (for 12 month prepays most likely) — so it’s cash in your bank, or cash you’ve spent, and while it’s revenue on your monthly P&L, you don’t get the cash until they renew.

Make a spreadsheet of all your annual (or greater-than-monthly) accounts that had pre-paid — add when their renewal date is, the expected contract value, and the likeliness to renew. Then build this into a ‘DR to Cash’ model you can add to your cash flow forecast for a more detailed guesstimate than you might normally have.

Trends: As well as cash, make sure you are watching the leading indicators. What’s happening with your pipeline and funnel? Are deals taking longer to close and get into billing? Your growth and installed base forecasts need to have a high-low model too.

Accounts Payable (AP): You’re probably on the receiving end of people being more mindful and frugal with each line-item on their expense sheet. Make sure you do the same. Get your credit card statements out and look through all supplier payments, it’s a safe bet that there’s thousands of dollars a month to be saved here without making extraordinary cuts.

Some larger suppliers may extend payment terms from 30 days to 90. Ask them all. If they don’t, ask again or ask for a reduced payment and ramp back up. Deferred payments or extended terms are better for both sides than a churned customer.

The harder you push here, the less impact you’ll have to make on your team when or if it comes to cutting costs further.

Cashflow Forecast: This is the most important worksheet. You absolutely must know your expected cash flow for the next few months, otherwise you will get caught flat-footed and risk the entire business.

I would have a row for ‘monthly credit card receipts’. Base these on your revenue projections now. Are you expected growth, increased churn, slower bookings to billings.

Add rows for ‘monthly invoiced’ (customers that pay by debit/wire/check) with an ‘expected’ (what you hope to get) and a ‘conservative’ line.

Add ‘usage’ if you have a usage component that’s billed monthly — and project the expected and the conservative estimates. If usage is a big part of your business, you’ll need to dig deeper here and watch daily trends of your customers usage to predict the high and low of where’s trending.

Insert your AR and DR cash flow forecasts — with ‘expected’ and ‘conservative’ views too if you have them.

Expenses you should already have, put in what current monthly costs are and forecast the changes, and times when one-off payments are due. Don’t forget to add non-P&L expenses like debt and interest payments to your outflows.

The net result should be a detailed expected and conservative view of your cash in and cash out for the next 6 months. If V1 sends you into the red on cash and you have no credit facility, you simply must find ways to cut deeper or collect cash faster.

Summary

Unless you have a huge cash surplus (12+ months runway) you must work on getting to cash-flow breakeven. And remember cash flow break-even and P&L break-even are not the same thing!

The break-even number is a moving target like it never has been before.

Growth, Churn, and Payment Timing have future unpredictability. You need to be all over the moves here so you can adjust.

3 Take-Aways: Over-react, don’t under-react. Protect the long-term, but survive the short-term. CASH IS KING.

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