Keeping the Lights On: A Guide for
Saas Finance Teams to tackle CoVid

Cash flow analysis, in simple terms, is the amount of money flowing in and out of your business. It measures the liquidity of your business. Analyzing your cash-flow is important during normal times, but during these volatile times, it should garner extra attention and focus.

BM: Cash flow is measured as net cash flow and gross cash flow. It helps to analyze if you're burning cash or building cash. Cash flow is the major reason why many businesses fail during good and bad times. Hence, it's crucial to understand cash runaway. I like to look at cash burn like no invoicing was being done, in simpler terms, no cash is coming in.

To calculate, look at your current bank balance and divide it by monthly operating expenses. This will give you an idea of how many months of cash runway do you have? If your business didn't invoice anymore, how long could you thrive with the runway amount? Delving a bit deeper into cash-flow, these are the main components you should be looking at,

These areas are our core business activities and ties down to the invoices we're sending out to customers. The first is "operating activities", which covers the operating expenses such as wages, rent, etc., Then comes "investing activities". If you're investing in servers, internal R&D, etc., From the "financial activities" perspective, it could be cash coming in from loans, stocks, or just principal payments on our term loans.

BM: You don't need a full financial model to forecast your cash-flow. Think about the cash receipts from your customers. Assess their paying methods, if it's recurring on credit cards or if you're invoicing and collecting that cash.

Look at cash paid from off operations, wages, rent, travel, investing, etc., Are you doing an investment that's not hitting your P&L in a non-cash way but hitting your balance sheet? Then look at your capital expenders on servers, computer equipment, internal R&D and your financing activities. Do you have debt or loans? Are you making principal payments?

All these need to be included in your cash-flow to calculate your ending cash balance. This doesn't have to be complicated, just look at the major investment buckets within your business. Look at your working capital which throws a huge focus on accounts receivables and payables.

Scenario analysis is the process of making business assumptions based on internal and external factors that affect the financial trajectory. Doing a scenario analysis will help you be prepared for any kind of situation you'll encounter over the next few months.

BM: During times like these, a scenario forecasting must be done with a weekly cadence. This is a great method because it'll help your business prepare for the future and be proactive, while you still have cash. In this process, you stress test your business. For instance, I run through worst-case assumptions. I keep my expense base the same and forecast by reducing booking revenue and increasing churn. This helps me analyze what these implications do to my company's margins and cash.

If cash gets tighter, then you can focus on your outbacks to determine which can be delayed or eliminated to increase your cash runaway. Also, focussing on the 80/20 rule will help you understand the major trigger that affects business. If you're a couple million in ARR, it's time to implement monthly forecasting in your business. This is a great financial discipline to have.

In times like these, we should be forecasting as our business and the external market is changing. Historically once a month would've been apt, but now, it's good to do it weekly. It also ties down to how fast your assumptions in financial planning is changing.

As a rule, I like to forecast for the worst and the most likely scenarios. This helps determine if your cash runaway shortens or lengthens. Thus, enabling you to take proactive financial actions which will extend your cash runway.

In a sea of metrics, you need to focus on the ones that matter the most, now. This being a difficult time, it's easier to get lost in metrics that don't add value to your business. By doing that, you'll be entering a landslide of inaccurate forecasting and financial management principles that'll take a toll on your business health. Ben tells us which ones should have our utmost focus during these volatile times.

BM: Focus on indicators that give you an advance warning of what's going to happen to your business. If your GTM model is inbound traffic, you'll know as traffic declines in your trial sign-ups, etc. If you have the outbound model, then you might not be getting leads coming in, which is a leading indicator for your pipeline failure.

BM: Lead velocity measures your monthly growth and qualified leads, thereby showing you the health of your pipeline development. The strength or weakness of the lead velocity rate helps you determine the impact on your bookings, recurring revenue, and cash. This is a good lead indicator for your business.

BM: Churn is an important SaaS metric. If you focus on mid-market and enterprise customers you can assess customer characteristics that indicate churn. This will help you proactively engage your customer success teams to reach out to customers and get the overall health status of their business with you. Assess your churn weekly and look at the traffic coming to your site. Try new methods to onboard your customers and make tweaks in your customer retention processes.

BM: This is good for customers who have an inbound go to market model where you've organic paid ads which drive traffic to your site. This metric measures your expansion vs contraction. A good SaaS quick ratio is greater than four. You'll be okay if you're 1-4. If it's less than 1 then you're contracting and in trouble. This might lead to trouble down the road. A good measure is to see each week where the net inflow or outflow of your ARR or MRR is going.

BM: During times like these, CAC ties up to the working capital of your business. Therefore, it's essential to find an efficient acquisition channel. This is the cost of ARR and will provide focus and discipline in your sales and marketing process by enabling them to focus on efficient channels. Also, it's good to remember that if your customers churn before they've paid the CAC, it just burdens your future customers causing a lot of working capital to get tied up.

BM: AR aging is an area to focus on when cash gets tight. It determines how long each receivable has been on our books. This issue crops up when you invoice your customers, which causes cash collections to take up work. Implement weekly meetings to monitor AR aging with your team and determine which customers are at risk. This will show what actions need to be taken to so that you can collect on that account. If your customer is looking like a potential churn, then you can engage your customer success to see if you can do anything to salvage that account.

The next important area to look into is how to improve your collection processes. Many customers are impacted worse or in a better way during this situation. The ones who've been impacted badly need to be handled with absolute care. But, payment collections are important to keep your business health afloat. Henceforth, you need to bring in methods that will help you be sensitive to their situations and collect payments in a non-pressurizing way.

BM: If you're invoicing to a mid-market or an enterprise customer you need to send a PDF and emails, as they're not paying by credit cards. You need to be sensitive to their situation and not push hard. Balance a nice cadence of reaching out to your customers often. It's good to establish a process in your accounts receivables team on how often you're reaching out or receiving out to customers who're having difficulty paying. It's good to have weekly meetings to determine what is the next course of action for these customers.

With economies in crisis, many currencies are depreciating against the US dollar which is the benchmark in most cases. This isn't good news for many businesses, as it ties down to increased operational costs which seem to be escalating, thereby impacting cash-flows negatively.

BM: In cash management, you've currency issues. During these times, the currency fluctuations are more fluid. But, here's something you can do. If your business is working with a national bank, they'll be having a treasury division you can work with, in case you want to invest in any short-term securities. They can also give you advice on how to hedge against your native currency devaluation by having some policies put in place for that.

To propel your business forward, you need sustainable strategies driven by key metrics in place. The decision-making process in your business is going to coincide with your customers across industries. While some might seem to manage this crisis well, the others are going to be negatively impacted. This, in turn, will affect your revenue flow. To shield yourself from uncertainty, you need to gain a strong foothold in your business. Here's how you can do that

WC: The assumptions we're going to drive into calculating these metrics is that your business is working with businesses that are likely to be negatively impacted. But some businesses are accelerating and managing this crisis fairly well.

Customer success teams are adding additional value to their existing customers by providing flexibility for billings, payments, collections, and driving upsells. There is an evident freeze on new hiring and open requisitions.

Here's what companies can do to effectively manage their business during COVID-19

Primarily companies tend to look at an array of metrics. But during times like these, you need to look at areas that matter, metrics that you can keep track of and take action in response.

Your areas of focus should be your operational, recurring revenue and sales metrics.

With a lot of uncertainty, many businesses are giving their customers to pause their subscriptions or provide delayed payment terms, extended trial versions, etc., These actions undertaken by your business can reflect on your revenue metrics.

WC: Companies are offering their customers paused engagement and providing temporary relief from a payment standpoint. These actions taken by companies actually lead to their dollars dropping. Even though we say it as contract expansion, it is technically a down-sell or a churned customer for the period they've ceased engagement with the product.

Sales and marketing metrics are keys you need to keep a watch on. If something changes, you need to know where and how to focus and invest in areas that matter most now.

WC: If you see a big decrease in new bookings, you're likely going to face an increase in churn. If you're looking at trailing on a three-month basis, we might spread this potentially over to six months. For enterprise customers, we'll look at some of the data over the last 12 months. If you notice your customer acquisition cost spiking up, you need to focus on mitigating the cost and driving a more favorable investment from a marketing perspective.

When you're looking at lifetime value standpoint, it's good to ask

While calculating customer acquisition costs, understand your payback period across different channels. If you see a marketing channel where the CAC is greater than the runway then try to minimize it. Focus on places you'll generate better ROI. Focus on areas where you can drive value and drive cash into areas where efficiency is guaranteed. The goal should be to either maintain your growth and protect you from potential loss from a revenue standpoint.

During these times it's better to focus on your collection mechanisms and payment flexibility. If any process is being automated it is directly proportional to the time saved. Small errors in calculations can lead to sloppy decisions. Considering the climate now, we need to be more vigilant with your numbers and eliminate manual errors.

WC: If there are ways to improve your collection and invoicing process by driving efficiency, you should go for it. Especially if it improves your AR collections process, which you need more of during these times. Also, considering the future, this is a huge area of focus and can drive a ton of value going forward.

Having data quality-related issues will give you incoherent metrics. Many companies have four different platforms using different tools. When there is no single point of truth it leads to improper metric calculations. There can be issues with their chart of accounts or data, but if your data doesn't flow across other sources there will be challenges that will be encountered.

To solve this, I think a good subscription management tool with visibility across channels can help drive normalcy and make things easier by aligning your metrics. This will be able to provide a central view of your financial data.

The post-COVID world is the most anticipated period for businesses. Many companies are looking at how their recovery will be. With many predictions being made which mostly lean towards a V-shaped recovery, but we're unable to tell for sure about the unknown. Uncalled for surprises in the world of finance spells chaos, which isn't good for your business. Therefore, planning for all the possible scenarios should be done.

KS: There are three different recovery scenarios we should be looking at. For those of you who're not familiar, the first recovery is V-shaped. This means you'll probably see a dip in your Q2 revenue, but by Q3, you'll be in a position to recover. The next is a W-shaped recovery. In this, you'll be seeing a dip in your Q2 revenue and will be anticipating a recovery in Q4.

The real worst-case scenario is the L-shaped scenario. In this, after the chaos, you see the growth to remain flat and recovery will be far-fetched during this year. These three scenarios should have a detailed revenue plan and spending pattern mapped so that you're prepared for whatever is set to happen.

A single dimension of looking at your transactions don't tally during these uncertain times. You need to compare and contrast some metrics wrt to other metrics to really know how well you're. So, therefore, you need to look at details from different angles.

KS: You need to look at your cash inflows and your receivables in terms of how much your customers pay. You have to look at your metrics from different dimensions. Like, do you want to look at it from the transaction level or the customer level or the invoice limit? There are different dimension chains on how you can look out for information that addresses the need.

Let's walk through some of the real-time boards that Chargebee offers that'll help you understand this better: u through Chargebee's real-time boards that'll help you understand this better.

Chargebee's real-time cashflow board

The board above shows you how much cash you're burning through the month. In a cash flow metric, the first thing you need to know is how much cash you're burning. From a finance perspective, the above data, which tells us how much payments have come through the week. This helps us look at our cash balance and the inflow of net refunds. It gives you a quick insight in terms of how things are progressing. Thereby, helping us manage our cash flow better.

The next is your AR aging report. This report will show you signs of bad debt and how your company is progressing from the receivables PoV monthly.

Chargebee's real-time aging report

An AR aging report in real-time lets you see how much money your customers have paid, outstanding amounts and current debts. Aging reports help you understand if things in your business are going the right way, showing you if you've any financial baggage. It shows customers who're not paying you, probably it might be good to reach out to them and negotiate payment terms.

The next aspect to be considered is the Annual vs Monthly cash flows.

Gross cash-flow report

This report will help you predict which cash inflows are better. Reports like recurring vs non-recurring are important patterns to learn about your cash flows. You can see payments coming through different gateways and the kind of customers who're processing payments. It shows you which payments are semi-annual contracts that'll help you predict cash. Also, if you predict your cash flow then what do you anticipate for a month? Then, start measuring the actuals, weekly that'll show you, how well you're doing.

From a business standpoint, it's important to look at channels that are effective in bringing in ICP leads.

Acquisition channels

KS: Chargebee, shows you real-time reports on where leads are being generated. This will help you cut down costs in channels that don't matter at the moment. For example, previously paid ads would've been doing the trick, but now, socials will be the channel bringing you the leads. What this does is, show you where you can double down costs on channels that don't work right now, to channels that work. This will help you channel your cash to the right places. Not just this, you can analyze an array of metrics that'll show you how well you're doing right now.

The next part you need to look at is your growth sustainability. Uncertain times like these call for a stable growth curve, which will keep your business afloat. But growth shouldn't be at the cost of profitability. If you acquire a customer with a higher CAC and low LTV, it means you're scaling but not profitably. Therefore, you need to look at metrics to keep your growth and profitability balanced to avoid overspending.

KS: One way to balance growth and profitability is by the rule of 40. If your growth rate plus EBITDA is 40% it means you're growing profitably. In this scenario, you should ensure that you're bringing in the right kind of customers and make sure that your retention is good.

The next area you need to analyze is if your growth is sustainable.

Sustainability vs profitability real-time reporting - Chargebee

KS: The advantage of an LTV metric is that it gives you an idea of your customers' quality. It also shows you how well you're able to retain them. If they look like they're churning you can nudge your success teams and learn the challenges they're going through. Maybe you can give them a discount, pause their subscriptions or perform actions that can increase their lifetime. Chargebee shows you how well you're able to retain your customers who came in a year ago and if you're able to scale and grow with them.

What would be your recommendation to finance teams to maintain a single source of truth with metrics that matter?

KS: The first thing to do is to analyze the situation you're in. Then make a laundry list of metrics that is relevant to your business. Listing them as business metrics and cash flow metrics will help you set the stage to measure them. You need to know how your leads come through, how many leads you generate and the conversion pipeline for it. The first step is about setting the stage and then figuring out how to measure them.

How do you trade-off between discount vs payment terms?

KS: This is a contextual situation and depends on your relationship with the customer. The only challenge you'll be facing with discounts is that you don't want your customers to get used to that situation given the scope for it. In this case, offering payment terms is better. It is also slightly easier when compared to discounts. But this depends on the dollar value you're attributing to it. If you're giving a minuscule discount but retaining existing payment terms, then discounting works.

How does automation favor finance teams during times like these?
KS: When working remotely, it's difficult for people to collaborate frequently. If you have an automated billing platform like Chargebee, it's easier to generate invoices for all the subscriptions you've seamlessly. Automation eases the friction in the ecosystem and makes it easier for employees working across different corners. Also, the best thing is, it is dynamic. We don't have to worry about missed payments, billings, collections, etc., which would be the case if tools like Chargebee ceased to exist.

Companies are now driving in a foggy situation at night. Shorter-term and flexible goals should be addressed now over longer-term forecasts. Your forecasting should be flexible and must help you to quickly pivot in the direction markets are going to take for recovery.

While closing new deals try to move into longer payment terms and contracts. This will give you more cash to operate in and pay for the expenses of your business. Ensuring a steady and visible cash-flow will help you stabilize your business during these uncertain times.

Right now, the main thing companies need to take into consideration is survival. Focussing on staying afloat and providing value by lowering your internal costs. High-value initiatives taken during this time can drive value to your business and build lasting relationships with your customers.

Doing business efficiently is important during these turbulent times. The right kind of subscription and billing tool eliminates friction in your finance ecosystem and makes decision making easier. It helps you narrow down on metrics and show real-time updates on how well you're performing so that you can react proactively. Your tool should bring in sophistication and agility and help you scale faster without being a cog in the wheel. Businesses should have systems in place that automates processes easing the miscommunications and mishaps that might happen in a remote working environment.