For 89% of SaaS business owners, new customer subscriptions are the number one growth activity. But with great growth comes great responsibility – especially where the timely matching of income to operations is concerned.
To grow sustainably, businesses that rely on annual subscriptions or monthly recurring revenue must work to improve cash flow so they can switch from relying on VC funded capital (for example) to becoming cash flow positive.
Here are 5 tips to improve cash flow for your SaaS business.
1. Invoice on a regular basis
As a subscription-based SaaS company, you can improve cash flow simply by invoicing regularly with the help of accounting software like QuickBooks Online (QBO). Not only does QBO let you send out digital invoices at the same time every month, you can include a payment link for your clients’ convenience.
For long-term projects, you might consider billing on a ‘percentage of completion’ basis, rather than issuing one large invoice. Billing at incremental milestones like 25%, 50%, 75% and 100% completion helps your customers pay smaller amounts – and assists your business with better cash flow predictability.
2. Set up recurring payments
Setting up and automating recurring customer payments can make planning around your business’s cash flow easier. And it’s doable even if you’re just starting out and can’t afford a subscription management tool.
Here’s how:
- Set up your recurring payments through your accounting software like QBO
- Have customers sign an authorization allowing you to automatically charge their credit or debit cards
- Schedule their payments for the same day each month
One downside that businesses face with credit card payments is the possibility of exceeding customer credit limits or incurring excessive fees. To avoid these problems, you could use a platform like Rotessa to collect pre-authorized debit payments instead.
First, create your recurring invoices in QBO, then integrate with Rotessa to automatically:
- Detect outstanding invoices
- Schedule withdrawals from customer bank accounts
- Reconcile payment transactions in your accounting software
The more painless you make it for subscribers to pay for your product or service, the better your retention is likely to be.
3. Find ways to reduce customer churn
It usually costs less to retain existing customers than it does to acquire new ones. That said, you can avoid certain cash flow problems by seeking client feedback and analyzing metrics like churn and CAC (customer acquisition cost) to help:
- Identify the reasons behind customer churn rates
- Make improvements before upping your sales and marketing spend
- Increase retention rates and improve cash flow directly
Remember: every customer you lose to churn reduces revenue, impacts cash flow, and makes it harder to cover costs like marketing expenses.
4. Manage your cash flow mindfully
Relying on 30-day customer credit terms when your expenses are due bi-weekly is a recipe for negative cash flow. Ideally you should schedule revenue to flow in before accounts payable amounts are due to flow out – especially if you have minimal working capital or struggle to collect unpaid invoices.
One way to avoid being strapped for cash is to beef up your cash flow statement with shorter payment terms or by offering discounts for early payments. Terms like 1/10 net 30, for example, encourage accounts receivable clients to pay within 10 days in exchange for a 1% reduction, helping increase your cash flow.
5. Build cash flow forecasts
Your business is more likely to succeed if you use forecasting as a proactive cash flow management tool. Cash flow forecasts help pre-empt worst-case scenarios by showing whether you have sufficient capital to keep running and growing.
Building a forecast lets you:
- Identify potential shortfalls in advance so you can optimize cash flow (by finding areas to reduce spending, for example)
- Strategize around certain bill payments without damaging supplier relationships
- Understand your cash flow runway so you can determine if and when you should fundraise, extend your line of credit, or explore business loans
Cash flow forecasts can also help you get the most from anticipated surpluses or positive cash flow – even if it just means keeping rainy day cash in a savings account.
Struggling to understand or improve cash flow for your SaaS business?
At Enkel, we keep companies like yours moving forward by streamlining revenue recognition and increasing cash flow visibility.
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