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Cash Flow Planning for SaaS Business

September 2, 2022

Cash Flow Planning for SaaS Business

Ariel Gottfeld

Ariel Gottfeld

Cash flow for SaaS business owners is often one of the reasons people start these types of companies. The basis of a SaaS company is that you’ll have customers paying in the following ways:

  • Monthly
  • Quarterly
  • Annually

You may opt to offer a lifetime subscription, but the long-term validity of the business is in the subscriptions that customers pay for time and time again.

There’s a good chance that you’re contributing to cash flow for SaaS business owners worldwide. If you have subscriptions to any of the following, you’re using SaaS:

  • Adobe
  • Shopify
  • MailChimp
  • Microsoft Asana
  • Zoom
  • Xero
  • So many more

Cash flow for a SaaS company is often more stable than a one-off purchase, and it’s going to be very steady – for the most part.

What is Cash Flow in a SaaS Business?

Cash flow for SaaS business models is:

  • Total cash in, minus
  • Total cash out

The cash flow for a SaaS company is no different than any other type of business entity. The main differences are seen in the way the cash comes into the business. Let's take a restaurant, for example.

Regular patrons may walk into a restaurant four times a week.

However, these same individuals may also stop coming in due to a variety of reasons. There is really no security in your cash flow in the restaurant industry. With that said, SaaS companies may or may not demand a commitment.

Since most SaaS business models are based on products that people must have or use in the course of business, the platform is likely to continue generating profits. For example, graphic design firms are going to continue to use Adobe Photoshop because it’s the industry standard platform for graphic design.

These individuals will continue to pay monthly and the developer benefits from steady funds to keep developers at the company.

Cash Flow Importance in SaaS Business

Why is cash flow for SaaS business models important? Every business needs to have positive cash flow at some point. In the event that a company persists with negative cash flow, it’s likely a tech company with a large parent enterprise funding the operations until they turn profitable.

Amazon is known to follow this concept, where the company will fund operations of a subsidiary that isn’t profitable.

However, if the retailer needs financing, a capital requirement for SaaS startup is to be cash flow positive. Showing that the business isn’t losing money is crucial to obtaining loans and financing of any kind.

Cash Flow Problems in SaaS Business

Cash Flow Problems in SaaS Business

Problems in cash flow for SaaS business models include:

  • Upfront investments
  • Initial wait to acquire customers
  • Delays in payment
  • Rapid growth and scaling necessities

Often, the biggest issue with a SaaS business’s cash flow is a lot of upfront investment. For example, you may need to make large upfront investments. You'll need to pay developers to develop the product, and this takes a lot of time and money.

Next, you’ll need to acquire customers, and the first payment is often delayed, causing you to offer service for free during trials or the first billing month.

Dealing with cash flow problems will require a strategic approach on your behalf.

How to Deal with Cash Flow Problems in SaaS

Cash flow for SaaS business is always evolving. If you want to deal with problems, the best options you have are:

  1. Secure a lot of upfront financing while waiting to attract your first customers
  2. Begin promoting early, giving demos and trial accounts to generate buzz
  3. Try and lock some customers into longer agreements, such as three-to-twelve-month options

You'll find that the main issue with a SaaS business is the large upfront investment that you must make in the business. If you can secure capital or run accurate projections to learn when the business may have positive cash flow, it will make operating with positive cash flow easier.

How to Manage Cash Flow for a SaaS Business: Cash Flow Management Tips

Trying to maintain cash flow for SaaS business models requires special consideration to:

  • Utilize pay-as-you-go services to only pay for the hosting that you actually use
  • Focus on the product and how it solves the pain point of the customer
  • Don't over-hire when the product isn’t profitable just yet
  • Run forecasts and projections to better understand your growth potential
  • Keep a close eye on inflows and outflows while trying to limit as many outflows as possible
  • Utilize software and apps to make cash flow statements and eliminate the need for expensive accountants
  • Categorize all of your expenses to make it easier to find opportunities to reduce outflows
  • Test our pricing strategies to find new ways to generate more cash, such as offering a discount to customers that pay upfront

Some SaaS businesses see their cash flow grow rapidly, while others take years to hit their breakeven point. You’ll need to have capital and investments to cover these initial growth stages to maintain positive cash flow.

Cash flow for SaaS business models should also include forecasts to help you make sense of the company’s potential cash flow.

What Should Be Included in a SaaS Cash Flow Forecast?

A cash flow for SaaS business forecast should include a lot of information to help you understand what your cash stance may be in the future. Some of the items that will be included in a forecast are:

  • What –if statements that look at what happens if user growth hits a certain threshold and what happens if it misses projections.
  • Total costs that you’ll incur during the forecast period and be sure to adjust for higher hosting and compute costs while growing.
  • Total income during the period to have the option of determining how much positive or negative cash flow you have.

You can also include cash flow from operations and investments, but if you’re a startup, you likely do not have this information available to you yet. Ideally, you’ll run multiple forecasts with a high and low forecast so that you can average them out.

Oftentimes, you’ll miss the high-end of the forecast but also do much better than the low-end forecast.

How to Improve Cash Flow in a SaaS Business?

How to Improve Cash Flow in a SaaS Business?

Cash flow for SaaS business revolves around signing up more customers. Unfortunately, you can only reduce hosting and development costs so much to help boost cash flow. The main way to improve your cash flow is going to be:

  • Signing up new customers
  • Marketing

Cloud hosting makes it relatively easy to scale operations, so it’s crucial to find ways to attract new customers. Some of the ways to attract new customers are by:

  • Creating demos to allow the customer to see the benefits of the platform
  • Offering free trial periods
  • Utilizing influencer marketing to spread the business’s name

You'll need to have a product that people love for your SaaS company to be profitable. Offer great prices, discount periods and trials to show customers how beneficial your platform can be.

However, keep in mind that even with a trial period, there will be hosting and compute costs that you must cover to try and convert the trial to a paid customer.

How to Help SaaS Business Owners Control Cash Flow?

Owners of a SaaS business will need a lot of help controlling cash flow, and there are a lot of solutions here that can help:

  1. Hire an accountant to help manage finances and make sense of them.
  2. Save money by using cash flow apps like Cash Flow Frog, which offers updated cash flow reports based on your financials.
  3. Create a strict budget and stick to it. This is primarily to avoid hiring too quickly.
  4. Seek out vendors and hosting companies that offer cloud hosting to easily scale as the business grows. Scaling can help businesses grow rapidly and not miss key growth periods due to inability to scale.
  5. Send owners reports weekly to show current cash stances.

Business owners can use reports to make smarter business decisions. If you provide owners with information and insights into cash flow, they’ll have a much easier time visualizing their cash position and can take the necessary steps to overcome any forecasted obstacles.

Make Accurate Cash Flow Forecasts with Cash Flow Frog

Cash flow for SaaS business models is easiest with the help of Cash Flow Frog. Your business demands recurring revenue, and through this revolutionary app, you can create error-free forecasts.

Cash Flow Frog knows the SaaS cash flow model and can help with:

  • Rapid cash flow reports
  • Forecasts
  • Projections
  • What-if statements
  • Custom insights
  • And more

Users can easily run SaaS cash flow projections using historical data to help them understand the trajectory of their cash flow over time.

SaaS companies financing needs to be cash flow positive, so projections can also help you secure financing for your business.

Cash flow for SaaS business owners will help you stay in the green, keep cash flowing smoothly and dictate your business decisions. You can even try Cash Flow Frog yourself to learn how it works and discover if it’s a good choice for your business.

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