on May 29, 2018 Financial Operations

4 Ways Spreadsheets Are Failing Your Recurring Revenue Business

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Are your spreadsheets hurting your SaaS business?

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 are the 4 ways spreadsheets are failing your recurring revenue business:1. Accurate metrics and sound financial operations make it easier to run your business. 

If you’re using spreadsheets to track revenue for your subscription business, you’re going to quickly reach a point where things begin to break down. SaaS businesses aren’t static, and the volatility you can get as customers upgrade, downgrade or cancel, is impossible to track using a spreadsheet. While spreadsheets can be a valuable tool for ad hoc financial analysis and financial modeling, they are really poor at managing data, which becomes the key focus of financial operations as a business grows. 

Before you know it, you’re making important business decisions based on disconnected, static spreadsheets and an error in one calculation can have a devastating domino effect.

It’s important to put a system in place that will allow you to make smart decisions, driven by insight from accurate data. You can’t do this by stitching together spreadsheets with a bunch of disparate tools. If you want to grow, you need a system that provides real-time insight into the financial health of your business.

2. Sound financial operations make your business more valuable to investors. 

Without the right financial operations and system in place, you’re stuck making important business decisions based on anecdotal or inaccurate information and, as a result, your business looks like a risky investment. This will ultimately lower your valuation and make it extremely challenging to effectively raise capital. 

If an investor or potential acquirer asks to see your revenues going back two years or even one year, you should be able to quickly and easily deliver. The earlier you get to the point where you can provide accurate numbers quickly, the more differentiated you are among your peers and the more quickly you can respond to bigger rounds of financing or a potential acquisition in the future.

3. GAAP financials alone aren’t enough. 

To run and grow a recurring revenue business, you must have solid GAAP financials and accurate metrics. This is another reason relying too heavily on spreadsheets is problematic.

GAAP financials tell you where the business stands today but reveal very little about the composition (new vs. existing) and reliability (high vs. low churn) of your recurring revenue. 

On the other hand, metrics such as churn, subscription momentum and customer lifetime value will give you visibility into those revenue components, along with the growth and momentum of your business. Even if you get one of these right, the likelihood that you’ll get all of them right in a spreadsheet is slim. Not to mention, you’ll spend a great deal of time trying to accomplish this impossible feat. By putting the right system in place, you’ll eliminate errors, decrease overhead and gain the peace of mind that comes with using accurate, sound metrics to quantify and make decisions that help grow your business.

4. It’s easy to forget the “operational” side of your financial operations. 

Because managing financial operations is very finance- and accounting-centric, many forget to treat them as having an “operational” component. 

If you ran a manufacturing company, you would be obsessed with the efficiency of your production line. You would devote tremendous time to identifying throughput and quality issues. 

Applying that same lens to your financial operations can tell you a lot. You don’t have to turn your financial operations into a precision manufacturing floor, but you should make some effort to identify constraints and quality problems (most of which I’ll bet will trace back to a spreadsheet). 

Don't let early success get in your way.

Managing the financial operations of a recurring revenue or SaaS business isn’t easy, but it doesn’t have to be a burden if you start off with the right system and processes in place. Long-term success requires a metrics-driven culture and operating model.

If you aren’t sure where to start or want to learn more, you can download our guide to SaaS financial metrics to better understand the financial metrics that are key to growing your business today and, eventually, satisfying and impressing potential investors in the future.  

Download the Metrics Guide