Your cash flow, or liquidity, is your business’ life-blood. This is especially true for start-ups and small enterprises, including SaaS and other subscription-based or recurring-revenue businesses. If your business runs out of liquidity to pump through its veins, it will inevitably struggle more and more to breathe and move, and will eventually be unable to operate.
While most SaaS businesses are great at tracking their relevant metrics such as MRR (monthly recurring revenue), churn rate, or ARPA (average revenue per account), many are not quite as proficient when it comes to cash flow planning. In addition, most of these businesses, especially recently founded ones, lack the means to hire an experienced CFO or finance director.
This is why Quaderno has put together a user-friendly primer on cash flow planning for SaaS businesses for you. We’ll give you a bird’s-eye view to help you untangle the maze and maintain the liquidity your business needs to be profitable and grow.
Benefits of sensible cash flow planning
So what exactly is in this for you? Why should you invest time and/or money to set up and improve your cash flow planning?
Good cash flow planning has invaluable benefits for any company, notably subscription-based businesses. Here are a few major advantages it yields for your SaaS business.
1. Streamline expenses and increase profit
As with so many things, visualizing all your expenses in an easy-to-read overview will help you spot inconsistencies and eliminate any unnecessary items.
You might be paying a lot of money for your office space, when there is a cheaper option just down the road. Or maybe you’re still being charged for individual software licenses when an overall plan for your business is a better deal.
Streamlining and optimizing your expenses will help you reduce unnecessary costs and thus increase your profit.
2. Explore various cash flow options and choose the best one
There are different cash flow paths to choose from for each business, and choosing one that works for your individual situation is vital for your company to stay afloat.
By simulating different options, you can get a better idea of future liquidity scenarios for your business. Exploring both the best and worst case ends of the spectrum allows you to reduce uncertainty, choose the right way forward, and devise suitable measures for each possible outcome.
3. Make smarter business decisions
Having a clearer vision of your liquidity parameters also means you can make better business decisions. Smart decisions are based on facts; solid cash flow planning provides you with the information you need to optimize your incoming and outgoing money streams.
Moreover, it will allow you to better plan your expenses for the months ahead and present more accurate reports on business performance to investors.
4. VC-funded start-ups: get clarity on your burn rate and runway
Businesses that are VC-funded have a limited amount of time – called “runway” – before they run out of cash. Staring this looming deadline right in the eye can feel intimidating, but it’s important for you to have clarity on your runway looks like to help you plan expenses accordingly.
Common planning mistakes to avoid
When it comes to cash flow planning, there a few common misconceptions and pitfalls you should strive to avoid. This will help you make the most of your planning efforts and get the best returns for your business.
1. Lack of accuracy
Meticulously paying attention to exact timing and quantities for your incoming and outgoing money streams can seem tedious, but it pays off.
You might have adopted a monthly approach to your cash flow planning, but not all of your expenses and revenues follow the same pattern. Some might be annual whereas others run on a weekly or even daily basis. Make sure you reflect this accurately in your planning.
Also make an effort to indicate exact amounts rather than lump sums. You need accurate data if you want to optimize your business decisions.
2. Overly optimistic forecasting
Most entrepreneurs always assume the best-case outcome for each business situation. While optimism is a desirable personality trait, it may prove very dangerous when it comes to your liquidity.
Stay conservative in your cash flow planning and consider that you will likely have to cover one or more surprise expenses at any given time.
3. Not adjusting your costs for growth
Growth comes with a number of costs that you will need to anticipate if you want your liquidity planning to be accurate.
These expenses range from minor ones like subscription and acquisition costs for tools and software, to major ones such as salaries for new hires or rent for a larger office space.
Failing to factor in these costs will have a devastating effect on your cash flow, so be sure to account for them.
Common cash flow issues & how to address them
Now that you have a good idea of what cash flow planning can do for you, and which mistakes to avoid, let’s get hands-on and look at how to address a few common cash flow issues.
1. Delays between expenses and revenue
If the credit terms for your customers are 30 or 60 days, but you have to pay your bills within one or two weeks, this will negatively impact your cash flow.
Aim for your revenue streams to come in before, or at least not after, you need to cover your expenses. Whenever possible, ask your customers for upfront payment.
2. Too many debtors
This issue is especially significant for SaaS businesses. If a client is not paying you on time for a service you provide to them, you are losing money on two fronts: You are not receiving the revenue owed to you and at the same time are incurring expenses delivering a service to your client.
To remedy this, you will need to use an automated billing service with the ability to cut a client’s access to your software if their payment is delayed.
3. Losing existing subscribers
Customers walking away from your SaaS subscription decrease your revenue and thus present a significant issue for your liquidity. You can only cover for your expenses through sufficient income, so you need to make every effort to reduce subscriber churn.
Find out why customers are leaving your business and adopt appropriate measures to counter this development. A higher customer retention rate will directly improve your cash flow.
4. Not enough new customers
In addition to retaining existing customers, you should strive to acquire new ones in order to increase your revenue and your liquidity. This will help mitigate the residual volume of customer churn even the most excellent businesses face, and grow your business.
Make sure you position and market your brand well, identify and address any issues, and continually strive to attract new subscribers for your SaaS business.
As you were able to see in this overview, your cash flow is of prime importance for you business. It’s what allows you to cover expenses and grow. Depriving your business of liquidity is like restricting the flow of blood to your heart – so make sure your SaaS company has enough cash pumping through its veins to enjoy success in the present as well as the future.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.