You’ve worked hard to acquire your customers, but holding onto them through multiple renewal cycles is really the key to subscription business success. Many SaaS businesses rely on auto-renewals to support the business. This is integral to the subscription business model, but it doesn’t mean you can kick back and relax. Common pitfalls related to renewals include:
- A lack of data or bad data which prevents you from seeing accurate renewal rates.
- Relying on untrained non-sales staff to handle renewals.
- Poor processes (based on the above) that result in customer contracts expiring without a sales call.
- Absence of knowledge about the best way to engage renewing subscribers.
When it comes to forecasting for a SaaS business, traditional financial metrics won’t get the job done. The lack of good financial data and metrics remains a big problem for most early stage subscription businesses, and even many established SaaS companies. Chances are, your business relies on outside funding or is subject to board oversight—or both. And the decisions that funders and boards make rely on accurate financial forecasting. A SaaS business that can efficiently and accurately generate, present and consume financial forecasting data makes better decisions for continued success. Don’t let your financials become a liability. Instead, you should be using forecasting data as a strategic tool to drive growth, generate new revenues and increase profitability.
Managing subscriptions in a global economy doesn’t have to be scary. But it sure feels that way sometimes. To compound matters, the finance team is frequently the most under-resourced department in a growing SaaS business. When you’re struggling to do more with less—and to maintain accurate revenue recognition—adding to the growing maze of spreadsheets and manual processes that now accompany your general ledger sounds like a nightmare.
Chance are, your early-stage SaaS business has a business-casual dress policy, but your financial metrics still need a buttoned-up Wall Street polish to attract savvy investors or potential acquirers. Much like a bespoke power suit would break the clothing allowance, powerful financial management suites are far too expensive to install and implement just to gain accurate revenue recognition metrics. So, you make do with a haphazard assortment of tools like QuickBooks and SalesForce manually pieced together with Excel spreadsheets and a lot of copying and pasting. Needless to say, this doesn’t achieve the cohesive look you’re going for.
So, what's up with the less-talked-about cousin, ARR? Are there any real differences, other than the obvious? Why use ARR vs. MRR in your business? How will bankers and VCs react to ARR vs MRR?
There are times in life when making ends meet is the only option. We’ve all faced situations where the only option is to take the path of least resistance or do what is “good enough for now.” Managing the financial operations of a recurring revenue or SaaS businesses is not one of those times.
In their early days, most recurring revenue businesses manage financial operations with spreadsheets, which are cobbled together with a number of different tools and then, human effort to bring it home. And while that may be good enough when a business is in its infancy, it creates a lot of chaos, overhead and problems down the road.
The good news is that it’s never too late to put a plan in place for solid financial operations that will serve your SaaS business now and in the years to come. If you’re managing your SaaS finances using spreadsheets, it’s probably time to reconsider your approach. Here’s why:
In most emerging and growth SaaS businesses, the focus is on cash flow and growth. Bookkeeping and choice of accounting methods is many times left to whoever is sending the invoices and paying the bills. And the method tends to be whichever is easiest and least expensive. Since you have to file taxes and for most early stage companies, taxes are done on a cash basis, then the company books tend to remain that way. What you save in bookkeeping costs may really cost you in the end.
Several months ago, I met an entrepreneur with a high-growth SaaS business. Being in the business of selling tools to measure subscription business metrics, I jumped right in, my mind set on a quick close.
I've been in sales for over 25 years, so I proceeded to knock down objections. The first, second, third objections came, and then more. Eventually, I realized there was no pain and backed off. Out of his mouth then came, "We'll start to look at metrics when we slow down, when we hit a month that wasn't bigger than the previous month."
To paraphrase Chris Rock, "you can drive a car with your feet, but that doesn’t make it a good idea." Similarly, sure, you can run your SaaS financial operations with spreadsheets, but if you do, you are injecting risk into your business. To be clear, spreadsheets are hugely powerful tools. We use them frequently, but they should be a complementary "tool" and not viewed as a "system" nor a "system of record."
For those of you who are already living with this issue and don't want any painful reminders, save yourself some time and contact us now to talk about how we can help. For those of you looking for information on what to expect, read on.
When it comes to SaaS, most people think of MRR as simply "Monthly Recurring Revenue." What you may not know is that despite having the word "revenue" in it, MRR actually is not revenue. To better understand MRR, think of it as "MRRR" – monthly recurring revenue representation. While MRR is a normalized number that provides a good representation of your monthly recurring revenues, it isn’t actual revenue that can legitimately be recognized under GAAP.