As the COVID-19 crisis continues to unfold, SaaS and subscription finance leaders are already looking ahead to the recovery phase and wondering how and what their peers are doing.
CFOs and investors recently gathered at the Sage Intacct virtual Modern SaaS Finance Summit to discuss managing cash, expenses, and expectations. Top of mind was the impact of the crisis and how finance leaders can help their companies get through the worst and prepare for better times ahead. In the course of discussions ranging across metrics, tools and communications, they identified seven strategies to help your company respond to the fallout of the pandemic, reprioritize your initiatives, and position yourself to prosper in the recovery.
1. Remember: Cash is king
In tight economic times cash management is king. This is the key metric to watch closely, especially in a pandemic downturn, where the impact economic can be broad and long-lasting. Financial pros want to keep a close eye on the company burn rate and continually reassess the ‘cash runway' estimates. An important factor in a subscription business is maintaining a clear picture of the revenue streams you can rely on, by customer, product, or cohort.
Ashmi Shah, SVP of Finance at Talix, spent the last few weeks running multiple scenarios to forecast her enterprise healthcare SaaS company. She emphasized the importance of maintaining enough cash to get through the end of next year, especially in light of the high level of financial uncertainty. She said that;
Securing new customers may not be as much of a challenge as the uncertainty of the second half of the year. So, try to forecast the second half impact on your overall plan for the year. Going through the entire P&L and then your entire forecast in terms of identifying nice-to-haves and must-haves. And, as we all know, our people are the number one priority; making sure our people are whole.
2. Know where you stand on churn
Beyond cash, finance needs to stay on top of churn - a metric that often doesn't receive appropriate attention, and can be especially volatile in these times when customers are looking to cut costs. There are various reasons why churn rates might be high, including the effectiveness of your ‘customer success' operation after the initial sign-up, whether subscribers renew monthly or annually, and how you manage the renewal process. For startups, churn can be a sign that you don't have ‘product-market fit', (a good product that solves a need), which can put your next round of funding at risk. Investors usually predicate a Series C round of financing on the idea that you have achieved product-market fit and will use the money to expand and grow.
The best positioned companies have the visibility into their customers in a way that they can adjust their initiatives. Peter Perrone, CFO of AtScale explains how they've adapted in order to reduce churn:
We model [customers] individually in terms of their renewal rates and other characteristics. Then we can very quickly make very customer-specific changes or macro changes and see the sensitivity flow through to the cashflow statement.
A monthly churn rate of 10% may sound small at first, but when that's compounded each month, your company is about to lapse into an irrecoverable death spiral. It means you'll lose half your cohort within six to seven months. For instance, if you sign up 100 customers in January but experience a 10% churn rate, by July, you'll have just 50 of those original customers. This is a huge problem that negatively impacts your LTV (customer Life Time Value).
3. Develop your what-if scenarios for the six C's of cloud finance
Currently, finance leaders are modeling multiple what-if scenarios across a range of metrics to evaluate their business plans and prepare for recovery. Bob Pinkerton, CFO of Conga, a contract lifecycle management company, shared how he's doing his scenario planning in preparation for economic recovery:
Understanding each client's terms is really critical when you're thinking about renewals and how they're coming up. In my view, the FP&A role is to come up with scenario planning, contingency planning, and more. How can we make sure that we've got the right kind of plans for different volatility levels and adjust assumptions around churn, new bookings, and collections?
In most instances, SaaS companies are well-advised to follow the Six C's of Cloud Finance in creating a comprehensive scorecard for your business and building what-if scenarios. These market-proven benchmarks can shed the right light on company performance:
Committed Annual Recurring Revenue (CARR) — The committed annual recurring revenue (CARR) metric evaluates the health of a SaaS business and shows its monthly and annual revenue cadence. CARR recognizes signed deals and nets-out known or projected churn. It's the most insightful monthly view of the business.
Customer Acquisition Cost (CAC) Payback — How long does it take you to pay back your sales and marketing costs on a gross-margin basis?
CLTV/CAC — This ratio shows the interplay between customer acquisition cost with the customer lifetime value equation.
Churn — The single biggest driver of lifetime free cash flow for a business. Measure both gross and net churn for a complete picture.
Cash Flow — Cash flow shows how efficient your business is. The closer you get to cash flow breakeven or cash flow positive, the more you control your destiny to invest in areas where competitors can't.
Cash Conversion — This represents the return on the capital you've invested in the business-the ratio of CARR to total capital raised to date.
A great example of managing a rolling forecast is from Mike Etheridge, VP of Finance at Arena Solutions. who explained:
When we forecast, we go beyond [profit and loss] and look at bookings, billings and cash flows. We keep all that information tied together. We're an annual subscription business, so we have to actively manage renewals.
4. Leverage tools that provide automation
For many SaaS companies, streamlining the order-to-cash process to adjust to today's business reality is critical. This is the time to find ways to make this and other business-critical processes more efficient through automation. When you put the right platform in place, you can move before your competitors do. For instance, automated billing can be a game-changer because SaaS companies have so many different components and variable billing terms. And any delays in billing mean delayed cash.
With cash at the top of everyone's agenda, agility and automation pay significant dividends. Along with multiple what-if scenarios, Ashmi Shah said she relies on automation:
Without an automated system, it can completely throw off your forecast and create a manual mess. We invested in and rely a lot on our automated billing because we have so many different components and variable billing terms. If we had delayed billing, that results in delayed cash. And right now, when cash is top of mind, getting really agile supports [the business].
5. Build revenue operations to guide your growth
Many SaaS companies are implementing revenue operations teams (drawing from finance, sales, marketing, and customer success departments) to define, identify, and maximize their predictable revenue. These teams need to work from the same data to get a holistic view of their recurring revenue to answer questions and guide the business through the economic recovery.
SaaS businesses seeking a competitive edge should consider building out this function as part of their recovery strategy. It's important to recognize that revenue operations involves more than merely acquiring customers. Monetizing and retaining customers is also a vital part of 'RevOps'.
6. Leverage your finance community to build personal resiliency
When it comes to communications, finance pros at all levels are relying on their peers more than ever to share resources as they respond to such a wide range of challenges in the COVID-19 era. Coming together and leveraging one another's strategies and knowledge can be invaluable as we all push toward our economic recovery. At the Modern SaaS Finance Summit, we discussed the value of finance peer groups. Amanda Kattan, from 4th & King explained that in smaller businesses, one day sometimes feels like a year in a larger business. She told the attendees:
Being part of a group where there's a significant level of trust, and people are willing to be very open and honest about their experiences becomes an extension of your team.
7. Update your board
While cloud computing is seeing significant disruption, the trends point toward a much broader growth trajectory over the long term - particularly for SaaS businesses. When communicating with your board, tell the complete story of the expenses you're adding and show that you can navigate through these turbulent times - better and faster than competitors. Regardless of what's happening in the market, you can still raise money to bolster your business and emerge stronger.
We all hope for a fast, safe transition. Preparing for that is the focus of great SaaS finance leaders. Whatever that eventual scenario looks like, you need to recover even faster than the companies you're battling in the marketplace. Join us for the Sage Intacct SaaS Success Series, which brings together finance leaders to talk about ways to do just that. The four sessions start June 18th — details here.