Managing cashflow is one of the most critical tasks for Finance. It’s startup life or death. Understanding your cash burn will allow you to predict your startup runway, and scenario plan for accelerated or decelerated growth periods. Cash burn is the result of cash-in from it’s customers and cash-out from its operations.
In order for CEOs to know how many resources to invest or disinvest for growth or stagnant stages, then Finance must know the drivers of the ins and outs of cash burn. For example, if the CEO asks you how much cash burn will increase, by doubling headcount, and consequently if and when the company will need to raise additional capital by executing on the hiring plan, or what the cash impact will be if the bookings projections are cut in half, then Finance can efficiently address and navigate these types of scenarios.
When scenario planning, you must always know how much cash is coming into the business, so that you know your baseline cash-out requirement to fund operations. In the example below, if you know your average monthly cash-in is $1M and you want to drive to cash burn target of break even, then you know your cash-out target is $1M, and you can effectively staff resources accordingly. If you don’t have a good handle on cash-in, then your cash burn can get out of control, and the business can end up running out of money.
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Projecting customer payments in SaaS can be complex because of the nuances in customer behaviors such as forecasting new customers, upsell potential, or downsells and churn. Other complexities are the mechanics of the customer contracts such as the billing frequency (monthly, quarterly, semi-annual, annual), payment terms (On receipt, N30, N45, N60, N90), or collections rate (delinquent payments). In order to forecast your cash-in with precision, you must schedule your future billings from current customers so you know how much future cash is expected from subsequent billings. For example, most customers pay for services over a period of time such as monthly or quarterly, so it’s important to know how much future billings are expected. Conversely, it’s just as important to know how the impact of annual upfront payments which can cause spikes in positive cashflow, which can provide a misleading cash runway indicator if a certain period of cashflow positive is due to onetime events.
When building out a model for customer payments, the framework should segment customers by new and current, with subcategories under current. I’ll explain more below.
New Customers: cash from new customer billings
Current Customers: cash from current customer billings
- Customers not up for renewal: billings scheduled to be invoiced
- Customer up for renewal: the risk of lost billings from customer churn
- Customers with upsell potential: expected increase in billings from current customers
Billings model for new customers: The illustration below, highlights how bookings (highlighted cells) flow into billings, using a quarterly frequency schedule versus a monthly frequency schedule as an example. Timing is really important in projecting cash-in, which is why it’s imperative to know the billing frequency in your contract structure.
Billings model for current customers: Stated above, current customers have three type of scenarios that influence billings, which are customers not up for renewal, up for renewal, and upsell potential. In order to model which these scenarios, you’ll need to have accurate customer contract start and end dates, so you can factor in the renewal timing.
Customers not up for renewal: These amounts should reflect the subsequent billings left on the contract (e.g. monthly, quarterly, semi-annual).
Customers up for renewal: These amounts are the billings at risk from non renewing based on their contract end date. As long as you know your churn rate, you should be able to accurately reflect the lost billings in your model.
Upsell potential: Upsell/expansion dollars are generally provided as quota targets, but because the incremental billings apply to current customers, an upsell amount should be factored into your billings forecast.
Projecting customer billings is a constant and ever-changing process, as new customers are added/lost, and billing frequencies change. So long as you’re record keeping the customer future billings, frequency, renewal dates, churn rates – you will be able to project cash-in with precision and scenario plan for any event.