If you are a growing SaaS business, it’s probably safe to assume that cash flow is one of the most important areas of the business to monitor. Due to the nature of how SaaS business models usually work, your company is usually spending more cash than it is bringing in, even if you have some healthy new sales figures. And if you have solid SaaS metrics, it should take your company approximately twelve months of payments to recoup the sales and marketing expenses needed to close that one customer.

With the above in mind, one of the most important sales jobs your company can do might come after a customer has agreed to purchase your product. In fact, this one post-sale agreement might even lead to your company closing more customers faster!

Get the customer to pay for multiple months upfront. Pretty simple, right? Anyone other than sales is allowed to answer that question….

I don’t think I’m dropping any earth shattering advice by stating a check for twelve months in advance is better than one check a month over twelve months. But I want to go a bit deeper on the multiple reason why it is so much better.

 

• Free working capital. Say you receive a check for an annual prepayment for $12,000 ($1,000/month). If you went to a bank for the same amount, they would charge you interest and make you pay it back. If you went to an investor for the same amount, you’d have to give up part of your company. But all a customer wants in return is a working product!

• Lock in customer retention. Every month the customer prepays guarantees one important thing: that they are a customer. If a customer is paying monthly as opposed to annually, there are eleven more chances the customer could not pay you. Even if you sign an annual contract, paying monthly doesn’t 100% guarantee the money. Shit happens. Cards go down and key stakeholders leave the company. Customers go bankrupt.

• Reinvest your returns. Much like investing for retirement, SaaS business models have a compound element to growth. You invest (via sales and marketing) to grow your customer base. And with the recurring nature of your revenue model, your investment (aka customers) should continue to pay you back for years after they come on board. That being said, getting the cash upfront from one customer will theoretically allow you to immediately invest it to acquire a new one if your CAC and CAC payback period is reasonable instead of having to continue to wait on monthly payments to reinvest.

Now, I get it…”easier said than done.” This is very true, and some customers will adamantly refuse to do this (I’ve been guilty of this from time to time…). Still, you should do WHATEVER it takes to try to make this happen.

I have absolutely no problem offering a discount to the customer to pay upfront. A 10-15% discount (around 1-2 months free) is well worth it to lock that customer in for a year and reinvest the proceeds. One key rule here, though: make sure you adjust the commission to your sales reps if offering a discount. They should be paid the same as if that discount didn’t exist and the customer just paid the full amount monthly; otherwise, they will have zero incentive to push for upfront payment.

This is a very simple but very important strategy for a company of any size to pursue. Done well and it can drastically improve the cash flow of your business and provide you with some much needed flexibility to make decisions with extra cash in the bank.

PS…consider yourself lucky I strayed away from present value of a dollar and/or discounted cash flow analysis! Next time……? 😉

Every now and then I get asked what are the most important metrics to track for a SaaS business. Invariably, my answer is “it depends” as these can change based on many factors. What life cycle your company is in, what your business model is, or even how you structure your sales and marketing teams are just a few reasons why it’s impossible to have a set list of most important metrics.

Let’s be honest, ALL metrics technically matter! But I’m not here to inundate you with 20+ metrics. If you’re looking for that, you should check out David Skok’s For Entrepreneurs blog, specifically his post on SaaS Metrics. It’s all there. And it’s amazing.

Assuming you didn’t jump ship completely on this post to go read the above-mentioned blog, I’d like to share a few of my favorite metrics (in no particular order):

 

• MRR (Monthly Recurring Revenue) and Churn – Yeah, yeah, yeah…these are two metrics and they are the basics. Doesn’t matter. Your MRR will be the first thing you are judged on when you talk about your business, and your monthly Churn will directly affect your ending MRR for the month. Once you get to a decent size ($1mm+ of Annual Recurring Revenue), you’ll want to shoot for 10% or more month over month growth to be considered fast growing.

 

• CAC Payback – CAC (Cost to Acquire a Customer) by itself is super important to calculate, but I’m skipping a step by listing CAC Payback. The metric is as simple as it sounds: how long it takes you on average to recoup the cost you incurred to acquire this customer via customer recurring revenue (on a gross margin basis, of course). It probably goes without saying that you want this to be as low as possible (oops, I said it…). The benchmark to shoot for here is to be paid back in under 12 months.

 

• Sales and Marketing Efficiency – This one is ever so slightly off the beaten path, but I’m a big fan. S&M Efficiency is calculated by taking the new ARR booked in a time period and divide it over the total sales and marketing spend over that given time period (or a previous time period if you have a longer sales cycle). Cousin of CAC Payback, S&M Efficiency is essentially doing a rough ROI calculation of your sales and marketing, therefore you want to be greater than 1 or 100% if you are calculating in percentage form.

What’s fun about CAC Payback and S&M Efficiency in particular is that if you are sporting consistently strong metrics in both of these, that is a good indicator to GO with regard to scaling your customer acquisition process!

Again, there are a boatload of additional important metrics to track, and it’s a great exercise to get in an operational rhythm by tracking all the metrics you find important weekly, monthly, and quarterly on a dashboard spreadsheet. Find the metrics that are hyper relevant to you now and expand as your business grows!

“Gross profit? What’s wrong with my profit? What’s gross about it?”

These are some questions I’ve heard before regarding the term “gross profit.”

And I can’t say I’d blame anyone without an accounting or finance background for asking these questions. The only problem here is that gross profit is one of the most important terms/metrics for a business of any size! It can help measure the overall health of your business; it can help determine future performance; heck, it can even lead to the demise of your company if not kept in check…

So, what exactly is gross profit? Let’s start with a good ol’ fashioned textbook definition: gross profit is total revenue minus the cost to produce that revenue. If that doesn’t help, here is gross profit calculated in the form of a few different examples:

 

• If you sell a physical product – You sell a shirt for $20 and it costs you $8 to make the shirt. Your gross profit for one shirt is $12 ($20 revenue less $8 cost of goods sold). You’d do the same calculation if you bought the shirts and re-sold them instead of making them.

• If you are a services business – Say you run a consulting firm, where you can charge customers an hourly rate for time spent working on a project. If you charge a client $50,000 for a project and it costs you $30,000 to pay your employees working on that project during that time, your gross profit on the project is $20,000.

• If you are a B2B SaaS business – Hmmm, this is an odd one. You are selling a product, but it isn’t a physical product — it’s up in the cloud! By now, the revenue portion of the equation is pretty simply, so the real focus should be on how to calculate the cost of goods sold. In this case, you’d take a bit of a hybrid approach. I use any software or tools used to run your software, such as hosting services for example, plus the fully loaded salaries of your Customer Support or Success team. Let’s say your monthly recurring revenue is $100,000, your fully loaded salaries for a couple Support/Success employees for a given month come out to $15,000, and you pay $5,000 for hosting and other support software, you will have a strong gross profit of $80,000!

 

As you can see, the gross profit calculation for the SaaS business is a bit more ambiguous than the other two. You can’t really identify the gross profit of one individual sale or project like the physical product or services examples. Instead, the cost to produce the recurring revenue is “shared” throughout all of your customers. Furthermore, in general, your new customers/revenue should grow disproportionate to the cost of goods sold, with revenue growing faster the expense to support it!

This is one of the beauties of a SaaS business: if you’re doing it right, you will have a very good gross profit (think 70%+). This will only increase flexibility, as a strong gross profit will allow you to choose between an easier path to profitability or an easier path to fundraising.

Now you know that gross profit is not only easy to calculate, but it’s also a pretty important business health metric for you to track! That doesn’t sound so “EWW!” after all, does it?

In my last blog post, I covered the what, how, and why of a financial model. In that post, I focused on mostly the theoretical side of why you should use a financial model or forecast to help achieve a business goal. But while this theoretical side might be the most important reason behind a financial model, sometimes building the damn thing can be the toughest part!

I’d first like to disclaimer that there is no right or wrong way to build a financial model. Everyone digests data differently, so what might work for me might not work best for you. That being said, I want to share a few of my favorite tips that I’ve learned over the past few years as my models and forecasts have evolved.

• Link and automate at all times. If there is one thing I can promise you, it is that you will change your assumptions at some point with your financial model. The worst thing you can do is have to make a change with a key assumption…and then make that same change in twelve other cells to keep your model working. Use formulas even for the basic math, as you want consistency with how your model works as your data changes. Referencing or linking cells in your formulas will also make your model more dynamic and reduce errors related to data quality.

• Use color coding to help organize the data. This may seem minor, but color coding your data (Links vs. Inputs vs. Formulas) will help you digest everything in the model a lot quicker. The standard formatting is blue font for inputs/assumptions, green font for links to other tabs or worksheets, and black font for all formula or output data (i.e. anything else you don’t have to manually calculate). I don’t use the green font that often, but I’m a HUGE fan of keeping my inputs blue and everything else normal black font. Pro Tip: see how few input cells you can use to drive the entire model. Keep the number low and you are a true modeling wizard!

• Spend the time on what’s important. Go into more detail or use more layers of assumptions on the key metric(s) in your model. I’ll go ahead and jump to conclusions and say this metric will most likely be revenue. Don’t spend a lot of time trying to figure out how much money you will spend on office supplies. I’d recommend taking the previous three to six months’ average amount for most expenses, do a quick sanity quick to see if that looks reasonable, and then move on. You are generally in control of expenses, unlike revenue, which requires a bit more thought. Avoid a simple __% growth assumption; instead make your revenue assumptions multi-layered.

• Example: a Sales Development Rep’s quota is 16 demos set per month —> 50% of all demos go to trial —> once in trial, 75% become new customers —> average deal size is $1,000 —> I expect $6,000 of new revenue generated assuming one Sales Development Rep.

Financial models can be very powerful tools in your business. Whether you use it frequently or infrequently, a model can be a huge help in setting and achieving goals, testing theories, and evaluating actual against predicted results.

If nothing above really stuck, feel free to make a copy of this template of a financial model that I’ve used for a bit (Disclaimer: this has been used mainly for a SaaS companies, so you might have to modify if you are not a subscription based software company). Good luck, and feel free to reach out if you have any questions about my crazy model!

Happy Modeling!

If you know me well, you know that I can geek out over a financial model. There’s something about a well built, effectively linked spreadsheet telling me how rich our company will be in 2.5 years that really revs the engines. But alas, we all know that the only thing you can count on with your financial model is that it will be wrong…most likely just one month down the road.

But fret not! The sooner you can embrace this fact, the sooner you will realize that accuracy in your projections isn’t really the point of your financial model. A financial model should help you organize and frame high level decisions, ideas, or goals by forcing you to sift through the detail of how you will execute them.

While a good financial model might be fun for me (is it clear by now that I’m a dork??), I can understand how this might be overwhelming for some. Stepping back, it might help to tackle a financial model using three simple questions: What, How and Why.

What are you trying to accomplish or prove out with your financial model? This could be anything: proving the viability of a new business; determining how you will scale your company with new investor money; analyzing how long it will take to get to cash flow positive.

How will you achieve your desired outcome? Once you’ve identified what you are trying to build, the next step is to figure out how you will prove it. This consists of the assumptions you make and the inputs within your model. I sometimes call these the “drivers”, as they steer the output or overall result of the model.

Why didn’t we achieve projected [insert any metric] results? The “why” portion of a financial model equation is best deployed when comparing actual results against the model. Comparing actual to forecasted allows you to dig deep and identify why your original assumptions were incorrect (remember, they most likely will be!). For example, Why didn’t we hit projected revenue? You might find that your variance is tactical — the company didn’t schedule the expected demos need to close X amount of revenue; OR it could be strategic — the original pricing strategy left some revenue dollars on the table.

Using What, How and Why will keep you focused on the main reason for building a financial model: helping you make decisions today in order to achieve future goals.

Yeah, yeah, yeah…that sounds great, but how do you actually build a financial model? Hmmm, methinks I smell a financial model series!! My next blog post will go into some tips to building, linking and presenting a financial model, and it just might include a template of what I use. So stay tuned…or consider yourself warned!

This could’ve been a young Ben Warren:

I sat down on Easter Sunday with every intention of cranking out a practical and educational post about the next exciting topic in tech startup finance. But alas- that just didn’t happen. I know.. I know…  I can practically feel the disappointment from anyone who reads this: “How am I going to get my accounting and finance fix this month?!?!” Well no frets – I’ve set a personal goal to write at least one blog a month, so you can tune in next month!

Last week marked my first week working full-time for Terminus. It’s an opportunity that I am so excited about, it’s hard to put into words.  I believe in the company’s idea, the leadership, and the team to grow Terminus into an amazing organization. But that is the future. I often get asked about the past… “How did you end up here?” So, today’s post is a brief snapshot of my professional career thus far.

My career is just seven and a half years old (if you include a “big boy” internship), so while I know I still have a lifetime ahead and a ton to learn, I think it’s safe to say I’ve graduated from “spring chicken” status. Here’s a quick recap of my two previous roles and a few things I learned from each:

Habif, Arogeti & Wynne – I began my career in the pits of the economy crash in January of 2009. Needless to say, I was a bit insecure. I assumed being low man on the totem pole in a demanding role meant I could be an easy cut. But I noticed something pretty early on: you don’t have to be faster than the bear — just faster than your slowest coworker. Not everyone performs equally and people would do just enough to get by without getting let go…

Well, I was REALLY scared of the bear. If I’m faster than the bear, there is zero chance it catches me. I had no clue what I was doing during my first year (sorry to anyone reading this who knows I worked on your tax return…), but I instantly decided that I was going to show my team that I could run through a brick wall to get something done. My worth ethic prevailed and it served me well.  I built a strong degree of trust and accountability from my managers, which created a very solid foundation for the next three years.

I learned very early that I couldn’t control the complexity of certain projects or my lack of experience, but I could control the effort I put into figuring that shit out! This concept was my favorite takeaway from my first job, and I feel strongly that it helped lead me to….

Atlanta Ventures – Landing this job was the ultimate combination of timing + “not what you know, but who you know.” One of my best friends (who previously worked for a David Cummings company) just happened to be taking a tour of the newly purchased Atlanta Tech Village and learned that the founders just happened to be looking for an accountant. (Talk about luck, huh?) I had an interview one week later and a job offer that night. Oh- and I didn’t have to finish another grueling tax season (sorry again to any former client reading this)!  🙂

I began working for Atlanta Ventures in the spring of 2013. I stayed with Atlanta Ventures for three years, however it felt like my own “mini career” because I learned SO MUCH during those short three years.  It was a complete contrast to my HA&W job: deadlines weren’t driven by government due dates and there were no layers of hierarchy training me and checking my work. I was either on an island or a very small team, and I had to figure out how to prioritize dozens of various sized projects with “asap” due dates.

It was overwhelming at times but I developed a belief that it was never a “stressful job.” Instead, I viewed it as an opportunity. It was an opportunity to make a meaningful impact on a startup’s business and an opportunity to put myself in the best position possible to take the next career step. Once I embraced this, the tactical side of the equation was easy. I changed my personal and professional habits in a healthy way (i.e. shifting my day forward 1-2 hours, networking more, etc). Yes, the alarm clock isn’t fun, but getting ahead (or in some cases, catching up) first thing in the morning always feels good.

I think reflecting on your past is really important – it helps you identify strengths, weaknesses, patterns, etc. And in this fast paced world, it’s hard to devote the time to self reflection. So in my wise old age of 30, here are the two biggest professional takeaways thus far:

 

• A great work ethic can help level the playing field when faced with limited experience or lack of knowledge.

 

• Identify your professional goals (whether internal or external) and use your current role to achieve them at any cost.

And with that, we’ll be back to regular scheduled accounting and finance fun next month!

Nothing is more exciting than when that signed sales order returns from the customer. Gongs are rung; KPIs or metrics spreadsheets are updated; sales start calculating what that paycheck looks like. But what happens after that? How does that signed sales order translate into cash in the company’s bank?  This can be a critical process for a company, and when done well can help bolster the company’s cash flow and accelerate company growth. However, if mismanaged, it could create a proverbial leaky roof that creates headaches and distractions.

A solid order to cash (or, as the cool kids call it, O2C) process can be tricky to perfect in a early stage, growing company. If too few people are involved , you run into single point of failure or capacity related delays in billings. If too many people are involved, you might run into data fragmentation or too many chances to miss a handoff.  A delay, error, or misunderstanding of the process could yield a wide range of problems including:

 

• Miscommunication to key stakeholders. This is especially true if you don’t have a solid grasp of the difference between bookings vs. billings vs. revenue. The booking occurs when you close the deal, but if you slip with the billing of the customer, you’ll never recognize the revenue. And key stakeholders (read: investors) really care about actual revenue over an inflated KPI dashboard.
• Frustrated Sales team. When your sales team busts their ass to close a deal, the last thing you want to do is make them wait an eternity to get that commission (note, I’m making a hopeful assumption you pay commissions only once customers pay first…). Every day that passes without the customer paying, the probability of sales distraction increases. Often times you end up with a sales team member tracking down late payments. While this may be necessary, if they are doing this, it means they are not able to do their main job: SELL.
• Cash flow constraints. This may be the most obvious, yet most important headache. If you are constantly struggling to get customers to pay timely, it’s almost like a double whammy: they are using your product (which costs your company money to run) but you aren’t getting the resources from them needed to pay those bills. Here’s an even worse scenario: what if you make a significant purchase decision based on the *expected* cash from a new customer but then struggle to get the cash in the door? It could be a very costly mistake for your business.

But fear not. You can avoid most of these problems with just a little bit of effort and organization. Here are a few of my suggestions to improve your O2C process:

 

• Well organized CRM – A well organized CRM with dedicated fields for customer contract and/or billing info (i.e. billing date, billing amount, contract type, payment method) goes a long way when reconciling what should have been billed vs. what has been billed. Being able to run a quick report to compare against your billing system makes the monthly reconciliation process much smoother.
• Accept credit cards and be cool with the fees. Some people prefer to be paid via check or ACH to avoid the ~3% credit card fee haircut. In the early days when you need that cash ASAP, the 3% fee is well worth the speed to get the cash in the door. Waiting for someone to pay via check or ACH is entirely out of your hands and you’d be amazed at how easy it is to forget to pay a vendor. I know because I’ve had my fair share of forgets….   🙂
• Invest in a good billing software – Find a software that makes it easy to take people’s money. This seems like a “duh” statement, but you’d be surprised at how confusing or deficient some billing software can be. I’ve used Chargify and Recurly before (both use Stripe as the actual backend payment processor), and while I haven’t found the perfect billing software, they work well for me now. **Note, I’m assuming the use of credit cards to accept payment here.
• Integrate billing links into the Sales Order. This may be my favorite one. Chargify and Recurly allow you to create a link for each of your products and/or subscriptions to share with customers in order to capture their billing info. If you make this a required field in the Sales Order, you’ll have arguably the most important step in the O2C process completed the minute the sale closes!

 

At the end of the day, your bookings are great but cash is king. If you take the time to focus on the process to ensure those bookings turn into cash as fast as possible, then one day you’ll be swimming in a pool of gold coins just like Scrooge McDuck.

Originally posted on the Blog of ProRata.

Revenue recognition rules might go down as one of the most “accounting-iest” concepts out there. You’re telling me that after a customer pays money for something just sold, specific rules need to be followed to record that revenue correctly in the financial statements? Well, if you report your financial statements on an accrual basis (and you should be if you are a growing company), the answer to that question is “yes.”

An Accounting 101 definition of revenue recognition simply dictates that a company cannot recognize revenue until the goods being sold or the services being provided have been delivered to the customer. Software has always been more complicated from a revenue recognition perspective, so much so that PwC had to release a 300 page “user friendly” guide to assist. Fortunately, that guide is more aimed at large, public companies with complex software licensing, not smaller, private companies with a subscription-based revenue model.

Subscription based software revenue recognition is pretty simple: you must recognize the total amount the customer pays evenly over the term of the contract. Let’s break this down using the same dollar amount a customer pays over three different contract terms. Say a customer pays $1,200 to use your software over these three different terms:

• Monthly contract – The $1,200 can generally be recognized in full right when invoiced or charged since the customer will have access to use the software for the next 30 days.
• Quarterly contract – You will have to recognize $400 a month for the three-month term of the contract.
• Annual contract – You will have to recognize $100 a month for the twelve-month term of the contract.

As you can see, this isn’t nearly as scary as it sounded earlier in the blog. However, this is where the pain kicks in: how do you actually make this happen in your accounting software? For as great as Quickbooks might be at providing a cheap and effective accounting solution, it cannot automate this task. So here are your options:

• Set up recurring journal entries on the front end. This requires multiple tedious steps and also presents a reconciliation nightmare if a human error occurs somewhere along the way or something changes. Not scalable.
• Create a revenue recognition worksheet in excel. This is better, but it still requires additional work to build and maintain if you want to scale it. Not to mention, there is still a risk of error if one measly formula goes out of whack. Not 100% scalable.
• Pay minimum of $12,000 a year for a clunky enterprise accounting software to automate. Nope.

Here’s where ProRata saves the day. ProRata integrates with Quickbooks to automatically create and record the correct revenue recognition journal entries for each contract. The real beauty of this is that ProRata sets up this automation upon creation of the customer invoice — no extra steps needed! ProRata can be so powerful for a growing company by saving time, eliminating reconciliation headaches, and improving financial statement accuracy.

Proper revenue recognition is a necessary evil for a growing subscription based company. But this evil becomes less daunting when you have the power of automation at your fingertips.