Owning and running a Saas business is definitely not a child’s play.
There are daily challenges and hiccups which the entrepreneurs have to face and overcome to keep the business running. Therefore, we have done some research, tried to understand the pattern and have come up with a few pointers for you to follow for your finance-related queries so that your business grows better and generates much more value for the employees, founders, and investors.
There are certain patterns that begin to emerge and the list below is an attempt to identify some of the most common finance-related questions and challenges that B2B SaaS founders face. Most of these patterns have been identified and covered in detail by some really experienced people of the industry and hence I have tried to include their names or links wherever necessary and the due credit they deserve.
Cutting to the chase, here we have the list of top 20 things B2B SaaS Founders should know about finance:
- Revenue recognition in a SaaS business: ARR and cash do not equal revenue.
- Cash is king — Without cash, no other metric even matters. As an entrepreneur, your focus should be on how business decisions and your product is impacting the cash flows. Building a capital- efficient business provides more credibility and positive growth.
- Venture funding could be a great way to finance a SaaS startup but there are both advantages & disadvantages to going down the VC path.
- Apart from venture capital funding, there are other funding options too like bootstrapping, debt etc. so don’t get stuck on venture capital funding completely.
- Consider planning and executing fundraising activity as soon as possible.
- Don’t underestimate the importance of Capitalization tables and understand how they work. They hold great importance when raising capital, granting stock options, or selling your business.
- Pay attention to how employee stock options work. Your employees will come up with questions on this since it’s one of the major compensation levers startups have and you must be prepared with the adequate and correct information to answer your employees.
- Understand the levers in your business when creating a forecast — and don’t have impossible financial projections.
- SaaS metrics — Do research and opt the ones which work best for your business.
- Always have a “cash cushion” as part of your financial planning since we often tend to underestimate costs and expenses.
- Plan your hiring only when you’re well prepared since statistics suggest that 70-80% of the costs of a B2B SaaS business is from employees and related stuff.
- Hire sales representatives timely and don’t forget to factor in ramp time and rep attrition in your sales forecast. Early stage companies reap good benefits by following this.
- Over-assign targets and quota at each level ranging from the sales leader down to individual reps.
- Remember, when it comes to an effective sales compensation plan, simplicity is the key. You may consider referring to this well-designed sales compensation plan from Jason M. Lemkin. It will be a huge lever for the business.
- Outsource all those activities which are manual and time-consuming to reliable and skilled third parties. For example- transactional accounting work like bookkeeping etc. Save your time and energy for more strategic tasks.
- You need a strategic finance leader much sooner than you think you need one. Unsure about it still? Read the above excerpt from Brad Feld.
- Understand the concept and relevance gross margin and how it impacts the scalability of your business and valuation iterated by David Cummings.
- Revisit your forecast regularly — you should consider monthly or at least quarterly. An incorrect and untimely forecast may prove to be a cost in the long run. Timely updating of forecast data can help you validate your assumptions and anticipate future changes. You can keep a check on it and can avoid making it go off-guard. Try keeping it as simple as possible which makes it rather quick to amend and update. You may try cash forecasting tools for better projection.
- Consider updating your Board of Directors and investors data at regular intervals. The updates aren’t required to be too detailed but can include quick highlights, challenges, and requests for help. The time investment is not much but the short and long-term payoff is huge. I really hope that I could at least include the major financial aspects for a SaaS startup. Forana initial level quick guide on early-stage SaaS finance, please refer, recommend and share this ahead.