Cash(flow) is King

When you collect revenue matters. a lot.

In the world of SaaS, recurring revenue is everything. Not all recurring revenue is created equal though. Whether your customer pays upfront for a full year, monthly or quarterly can make an enormous impact. In fact, the cash flow delta between annual and monthly payments can be the difference between a profitable business with an expanding bank balance, and bankruptcy.

To demonstrate this issue, we’ve modelled out a fictional (simplistic) SaaS company (model here if you want to rip a copy). The business has £1.5M of ARR and a net burn of £100k per month at the start of the model. They’re growing fast, with an 8.5% monthly ARR growth rate, equivalent to 2.5x annual growth year over year. There’s some operating leverage in the business, with costs growing more slowly than revenue at 7% month over month. With those characteristics, they’ve been able to raise a £10M Series A and so have a bunch of cash on the balance sheet.

Modelling out this company we can see that if the company charges upfront for its product, it ends up breaking even and turning a profit. Cash on the balance sheet increases and the company is looking healthy. Shift that to monthly payments though and it’s another story. In this scenario the company ends up going bankrupt in a little over two years assuming no further injections of cash. These two scenarios are the same company, with the same growth rate, the same cost base, and the same starting cash balance. The only difference between the two is whether their customers pay upfront annually, or monthly.

In the real world, there are additional challenges with monthly or quarterly customer payment terms. Firstly, it requires a lot more work internally to issue invoices and keep track of payments. Secondly, getting customers to pay on time on a regular basis can be a huge headache. Larger customers will often have onerous payment terms and can take up to three months to settle an invoice. All of that impacts cash flow and burn.

The takeaway from this is that the timing of cash flow really matters for fast growing businesses. It’s easy to forget about it among the plethora of seemingly more important SaaS KPIs, but charging upfront enables you to pull the future forward and use revenue to fund your future growth. Remember cash is king!

Inspired by Peter Reinhardt