SaaS CFOs Need to Think Different

Software as a Service (“SaaS”) is a great business model; simple deliverable processes, massively scalable operations, and a distribution network (the internet) that is effectively free.  Many entrepreneurs with a great idea build their offering as a SaaS business model.

But especially for start up firms, the role of CFO in a SaaS business needs to think about and implement processes and procedures that traditional business models do not.  In many start ups, the founder is also wearing the CFO hat at the start and he/she may not have a traditional accounting background.  This is good because the CFO’s role needs to be incorporated early in the venture and it needs to consider these specific points:

1)      Revenues and costs recognition needs to be super tight.  Traditional long sales processes and large upfront contracts in the software industry allow for revenue and cost accounting to get sloppy.  No so in a SaaS business.  Often times a company must deliver their services before getting paid in a SaaS environment.  Even in a month-to-month invoicing cycle, the company is effectively financing their clients (albeit for a short period).  Most firms do not take these financing costs into account.  Also, the timing of revenues generation vs. cashflows is critical in a SaaS environment.  Just because you invoice in arrears, does not mean your revenues are generated in that invoicing period.  Keep your revenues and costs in the correct time period or your growth metrics will be off and your future planning will not be effective.

2)      Important metrics are no longer purely financial.  In setting up your SaaS business, ensure that the CFO has access to the following metrics:

  1. Client attrition.  The biggest factor in success or failure for a SaaS company is client churn.  Inherent to the thinking of a SaaS business is the recurring revenues stream from existing clients.  The financial effect of high client churn is an exponential (not linear as many would first think) decrease in revenues.  It may be the Sales & Marketing team that is responsible for keeping client churn low, but the CFO better be aware in real time of the trends in client churn.
  2. Upgrades.  Most SaaS firms have differing levels of services and costs.  A rolling, validated estimate of ongoing upgrades is crucial for a CFO to allocate resources to different projects within the company.  This is also crucial so that the company can invoice correctly.  Allowing for clients to upgrade without cost not only hurts the bottom line, but makes the company look sloppy.

3)      Get Paid Up Front.  Ideally the SaaS Company can convince its clients to make payment up front.  Maybe even use a client dashboard for clients to log into and allow them to select which services they wish to use for the upcoming payment period.  The client dashboard is a great place for SaaS companies to introduce new services and or partner firms as well.  But payment up front can be a barrier to the sales process.  The company may want to offer an invoicing option for enterprise level clients and use the “pay first dashboard” option for smaller clients.  Another option is to offer a discount to clients who use the dashboard/upfront payment system.

4)      Service Sells.  SaaS businesses are less dependent on traditional sales roles and more dependent on customer referrals.  Therefore your best salesperson is probably your best client service representative.  An SaaS business will see a better return on investment by grabbing an all-star client service team manager than an all-star sales person.

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