May 13, 2020
The financial impact from COVID-19 has been substantial and pervasive with many small and medium sized businesses feeling the biggest impact. The current economic conditions have forced founders and business owners across all industries to face the current crisis head on and find ways to keep their businesses afloat.
Many software companies are well positioned to weather the current economic storm. If you are a business that provides mission critical software to your customers, that gives you a clear advantage over businesses that provide products or services that are otherwise expendable in tough economic times. SaaS businesses are even better positioned given the recurring and predictable nature of their revenues. Despite these advantages, as a SaaS founder, you will still want to keep a close eye on your costs and liquidity (ie cash flow).
In that spirit, I offer up a SaaS CFO survival guide for managing the financial impact of COVID to your balance sheet and cash flow in these challenging times. The three areas to focus on are:
Monitoring your accounts receivable is crucial to understanding your future cash flow situation. Most accounting systems have a report you can generate called an “Accounts Receivable Aging.” This report will show you outstanding invoices by customer. I would urge you to review this with your sales and customer service teams (whichever group is focused on customer collections) on at least a weekly basis (depending on your situation, daily may be necessary) and use the report as a tracking mechanism for how well you are collecting your receivables.
You will want to look at your current customers and make your best estimate of who is at risk of not paying for the next six months. You will also want to arm your collections team with options they can use to keep your customers on a payment plan. This could include the option of suggesting downgrades to certain “at risk” customers to retain revenue and minimize churn.
The key message to your sales and customer service teams should be “do everything and anything you can to retain our current customers.”
As much as you can, accelerate your receivables. I recognize this may be difficult to execute if some of your customers are struggling to manage their own financial impact of COVID. The following options are levers you might think about pulling to improve the pace and probability of collection:
You will need to balance your desire to keep cash collections flowing with your customer’s desire to reduce or stop cash outflows. If you have a good relationship with your customers, you should be able to find a common ground. Remember, how you show up to your customers in times like these can go a long way towards their long-term retention and the longevity of your business.
Managing how and when you pay your vendors is another important factor in the success of your overall cash flow management. Similar to what we discussed with your receivables, I would consider creating a list of all of your vendors and the spend you have had with them over the past twelve months. I would go through each vendor, starting with the largest, and formulate a strategy as to what you want to ask of them in terms of discounts, deferrals, etc.
For example, one of your biggest areas of spend may be rent. There are several paths you can take when approaching your landlord about a discount or deferral of monthly rent:
The key here is to be creative and don’t be afraid to ask for what you want. With vendors other than your landlord, rather than paying your invoices immediately, try negotiating temporary net-30, net-60 or even net-90 payment terms. Doing this will allow you to conserve cash by extending your payables. Even a small extension or delay can give you some much needed wiggle room on cash flow.
Know that while these conversations are hard, you are not alone. We are all experiencing the difficulties and hardships from the current coronavirus pandemic and resulting economic impact. Your vendors are going to want to keep you as a customer just like you want to keep your customers. This means there is a high likelihood that many of them will be flexible and work with you to find payment terms that work for both you and them.
Now that you have a game plan around accelerating receivables and stretching your payables, the next step is to put together a cash forecast for your SaaS business. A cash forecast is simply an exercise in tracking your cash inflows (ie revenue) and cash outflows (ie costs).
Regarding your inflows, my advice is don’t underestimate the impact this crisis will have on your revenue. Now is not the time to be liberal with your revenue growth forecasting. In a worst-case scenario, assume new bookings slow to zero, churn increases, upgrades shrink and downgrades increase.
Realistic financial planning now will help you make informed decisions about your business.
Remember that there is a difference between recognizing revenue (ie when it is billed) and collecting revenue (ie when the cash is received). You will want to create your cash forecast based on when you expect to receive cash from your customers. This is why focusing on the collection of your accounts receivable, as mentioned above, is such an important exercise.
When it comes to your cash outflows, I suggest thinking about them in terms of two buckets: non-headcount and headcount.
For your non-headcount expenses, prioritize costs that are mission critical and generate revenue and consider putting a freeze on, or heavily cutting, the rest of these expenses.
There are 5 key areas to consider when evaluating your non-headcount costs:
When assessing non-headcount spending, be sure to identify what can be cut immediately versus what can be cut if the current state persists. You want to be thinking about balancing fiscal responsibility in the short-term while avoiding permanently handicapping your business in the long-term when we get to the other side of this crisis.
In most SaaS businesses, payroll is the biggest expense lever. Good talent is both necessary and expensive. As a leader, it’s your responsibility to do everything in your power to protect your employees before considering headcount reductions. Your business will make it to the other side of this and you’ll need an A+ team to keep winning. The goal is to balance taking care of your people to the best of your ability while positioning your business to be able to endure through the current environment and yet be in a position to resume growth once we get past the current crisis. Not an easy task by any means.
When making decisions on payroll, you typically have three choices:
Before we get too far here, I feel compelled to recommend that you always consult your HR leader or an employment attorney when it comes to the treatment and compensation of your employees. These decisions affect the bottom line, but they also affect your people.
When assessing your headcount costs, the ideal option would be to retain your full team.
There are a number of options to consider that could allow you to make meaningful reductions in headcount costs without having to make layoffs.
These won’t be fun items for you to share with your team but if doing so means everyone gets to keep their jobs then it may be necessary, and your employees may ultimately be thankful you took this approach in the long run. At ASG, our companies have taken a mix of creative approaches to retain employees over the long term.
If you have done all you can and you must make job cuts, don’t forget to include severance in your cash forecasting.
Once you have identified the expected amount and timing of your cash inflows and outflows, we suggest creating a rolling 16-week cash forecast. This means that you are forecasting your weekly cash flows 16 weeks (approximately four months) ahead at any point in time. You should think about updating this 16 week outlook on a weekly basis. Taking this approach will force you to have a forward-looking view on cash and allow you to make the necessary decisions now to avoid liquidity issues in the future.
If you haven’t already, I strongly encourage you to look into taking advantage of the multiple financial relief options provided in the CARES Act passed by Congress to address the economic crisis brought on by COVID-19. This act provides small businesses like yours with access to capital through low interest rate loans, payroll tax credits, deferral of the employer’s portion of social security taxes and other financial benefits. These benefits are designed specifically for small businesses and can be a helpful way to provide your business with additional cash inflows.
Your goal right now is to survive and make the right short-term fiscal decisions so that your business has a chance to sustain over the long term. You’ll need to think long and hard about what is essential to your business. Prepare yourself for slow to no revenue growth in the foreseeable future. Fight like heck to keep your current customers, and don’t be afraid to ask for payment relief from your vendors. You are in survival mode and must do what you can to keep the lights on and your business running.
There will be an end to this pandemic. With a few hard decisions now, you can maintain your business and put it in a position to come out the other side of this tough economic environment ready to thrive again.