In the fast-paced tech world, things have changed. Not so long ago, everyone thought that growth was the single most important KPI, and making profit often took a back seat. But recently, with the change of winds in the global economy, startups have had to rethink this approach. They’re now learning to rebalance growth and profitability right from the start.
Whether you feel cash constrained or not, finding this delicate growth-profitability balance is important, throughout the startup life cycle. Early, middle or late stage startups, none of them want to be losing money on every transaction. This is especially important in SaaS businesses, where there is high cost of user acquisition
In this article, we’ll take a look at the significance of accounts receivables and how finance teams at SaaS startups manage them as well as the critical implications the finance team’s practices can have on the startup’s resilience and even survival.
The growth-profitability balance – by startup phase
Early stage startups: Starting small but dreaming big
Early stage startups need to be aggressive about growth. They’ve got big dreams, and their primary focus is growing their customer base as quickly as possible. Profit isn’t their top priority right now. While profitability remains secondary, having a clear understanding of per-customer unit economics is important – both for raising more funds, and for making smart business decisions in the future.
Mid stage startups – Starting to scale
Things get tricky as startups start to grow and mature. Profit starts to matter more, to demonstrate business sustainability over time, but high growth is still expected. Now will be the time to start looking at cohort profitability – figuring out which groups of customers are making the company the most money over time. The goal is to find the sweet spot – grow steadily and make enough money to keep going. It’s a delicate tightrope walk between the urgent need for growth and the responsibility to be financially self-sufficient.
Mature startups: IPO on the horizon?
At some point, successful startups start thinking about going public. It’s a big deal. Now the company finances go under a magnifying glass. Bad habits, overspending or inefficiencies in sales and marketing, trying to achieve growth no matter what the costs are can make or break the IPO, and the future of the company.
Key tips for staying on top of your SaaS business KPIs
In the competitive world of SaaS, measuring success is crucial for businesses to survive and thrive. Being able to track the most important KPIs is vital for making informed decisions, and financial data is no exception – the goal is a “no-surprises” approach to running finance.
Tip #1: Know your cash
A simple statement, but unfortunately, it’s rarely the case. You can’t rely on stories, promises and spreadsheets. Implement a digital software solution, such as OPYO, to be able to monitor and understand cash analytics, regularly.
Tip #2: Know your cash flow
Annual and Monthly Run Rates (ARR/MRR) and Profit and Loss accounts offer valuable insights and are important metrics. Yet (especially) in challenging times, the real king emerges – cash flow. Cash flow information becomes the compass that guides startups through turbulent waters. Understanding the actual cash flow is crucial since what’s recorded on the books as revenue doesn’t always translate to real cash in hand. This can lead to a scenario where you are lower on cash in reality compared to where you think you are – that’s a risky place to be in.
Tip #3: Don’t compromise on accurate cash forecasting
As mentioned above, run rate and actual cash don’t often correlate — booked revenue that wasn’t yet paid and sits in aged accounts receivable (AR) — revenue but no cash.
Accurate cash flow forecasting depends on running a tight ship when it comes to Account receivables (AR). Easier said than done. Looking at company finance departments, we see several key challenges to efficiently managing AR, enabling accurate cash flow prediction.
Efficient Accounts Receivables management: Challenges
Managing account receivables can be a challenging and daunting task, but if dealt with correctly, it can also reveal opportunities to grow, adapt, and strategize. Let’s overview some of the common challenges around accounts receivables management:
Weak enforcement of payment terms
Many businesses offer products or services on credit, with invoices tied to specific milestones. Ensuring timely payments in such cases is essential, yet challenging.
Lack of monitoring
Monitoring accounts receivables data for insights can be challenging, but it can raise early warning signs you don’t want to miss. Here are a few key metrics to look at:
- Days Sales Outstanding (DSO) – indicates the average time a company takes to collect payment after a sale. It is considered healthy when it remains within 50% of the stipulated commercial terms. For instance, if the payment term is EOM+30, a favorable DSO would be 45 days.
- CFF Accuracy – To forecast cash flow effectively, it is recommended to adopt a bottom-up approach. This involves analyzing DSO at various levels, starting from individual buyers, progressing to business units, and culminating at the corporate level. This detailed assessment allows for a comprehensive understanding of receivables management and facilitates precise cash flow predictions.
- Best Possible DSO – Indicates what your on-time payment turnaround is going to be.
- Average Days Delinquent (ADD) – the average number of days it takes to collect late payments. The lower your ADD score, the better.
- Turnover Ratio – shows how well you manage the credit you provide your clients and how efficient you are at collecting payments. The higher the ratio the better.
- Collection Effectiveness Index (CEI) – helps to understand how strong your accounts receivable management is
- Decentralized AR management
Businesses lose control of AR if they can’t centrally track them or easily audit customer communications.
Ineffective communication strategy around AR
If you’re not clear and formal about payment expectations, and your no-delays policy, customers may think it’s OK to be late.
Sluggish dispute resolution
Customers will tend to hold payments until disputes are resolved or corrected. Disputes can also worsen the relationship with the customer, creating unnecessary friction that makes it much more difficult to collect payments – leading to bad debts or increased credit risks.
Lack of Payment Incentives:
The absence of incentives for early payments may encourage customers to delay, prioritizing their own liquidity for as long as they can, an incentive to pay early can help – directly affecting cash flow.
Conclusion: Sailing Towards Success
Smartly navigating these challenges is critical for creating a resilient startup that can sail beyond early growth stages into stable profitability and growth. These aren’t just obstacles; they’re the building blocks for creating a strong foundation for lasting growth.
Collection and how you manage Accounts Receivables is not just about overcoming financial hurdles. It’s about helping the business generate and identify opportunities to grow, adapt, and strategize – all are critical capabilities in the dynamic world of SaaS.