How SaaS startups should manage cash through economic uncertainty

Some founders have never dealt with a cash crunch. It's time to learn how to manage one.

Ed Byrne

Scaleworks CEO Ed Byrne argues it's time for founders to exercise common sense when it comes to their company finances. First rule: Cash is king.

Photo: Courtesy of Ed Byrne

Let's not underplay the current situation: We are in crisis mode. Not because we're heading toward a recession, not because SaaS companies might shrink, but because of all the unknown unknowns. Fear causes irrationality, so software as a service CEOs must demonstrate reasoned leadership and make decisions that protect the business, and the team, for the short and long term.

Long-term thinking is good, but not if you don't exist. At the same time, too much short-term thinking is bad, because there won't be a long term if you take too many steps backward.

I hate to over-use our favorite phrase at Scaleworks, but now really is a time to exercise common sense when it comes to managing company finances.

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. SaaS businesses can continue to sell, support and work on the product with low operational impact in a distributed manner, even if it's only temporary.

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Working in a high-margin industry 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 spending 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 $10 million per year and only had $1 million to $2 million to run the entire business? That is the reality for many companies.

Quick mental alignment

Don't bury your head in the sand. This is not business as usual; most likely your business is going to experience issues with cash, collections and revenue over the next few months.

In times like these, I think it's better to overreact than to underreact. If you overreact, you might end up discovering you were too conservative. But you'll do that from a desk where you're running a business that still exists. If you underreact, you won't think long term.

I'm not an accountant, but I've run SaaS companies and sit on the board of a few. Here's what I'm telling our CEOs: For SaaS companies, growth trumps efficiency. You can't be focused on growth and penny-pinch at the same time. Now is the time to pick the latter.

Getting on top of your cash flows, line item by line item, is a great skill to build. You'll use it for the rest of your business career as an operator and advisor.

Make a cash management plan

Cash on hand: Do you know how much cash is in the bank right now? How much was there yesterday, and the day before, and what will be there tomorrow? Do you know what money is coming in and out?

When incoming cash is likely to substantially slow 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 cannot run close to zero, no matter what.

Accounts receivable: This will be an indicator of future cash flows, so watch the trend. I would make a list of all customers in AR, and age them by 0–30 days, 30–90 days, and 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 six months.

Your profit and loss statement 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 looking to defer their payments; this all goes to AR even though top-line revenue isn't affected. Managing AR now is crucial; don't delegate this to your accountants. Customer success should help, as should your salespeople.

Deferred revenue: 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've already collected, so it's cash in the bank or cash you've spent. And while it's revenue on your monthly P&L, you don't get more cash until they renew.

Make a spreadsheet of all your annual (or greater-than-monthly) accounts that have prepaid. Add the date of their renewel, 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.

In addition to 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: Your customers are being more mindful of every line-item on their budget, and you should do the same. Review supplier payments. It's a safe bet that there's thousands of dollars per 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 agree, 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.

Make a row for "monthly credit card receipts ." Base these on your revenue projections now. Add your expected growth, increased churn and 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 watch your customers' usage to identify trends. Insert your AR and DR cash flow forecasts, with "expected" and "conservative" views, too, if you have them. Add your monthly expenses, and list when one-off payments are due. Don't forget to add non-P&L expenses like debt and interest payments to your outflows.

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

Unless you have a huge cash surplus — defined by a runway of 12 months or more — you must work on getting to cash-flow breakeven. And remember: Cash-flow breakeven and P&L breakeven are not the same thing. The break-even number is a moving target like it never has been before. Growth, churn and payment timing aren't predictable, so you need to be prepared to adjust.

My advice: Overreact, don't underreact. Protect the long term, but survive the short-term. Cash is king.

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