The annual SaaStr conference was in full swing last week. Were you one of the 10,000 B2B SaaS and subscription business leaders in San Francisco learning the latest SaaS trends, insights and best practices? As an entrepreneur, and leader of a SaaS-based company, I’m in the same position as many of the CEOs/founders attending this event. And like you, I can relate to placing most of your focus on growth, sales and marketing – especially at opportune events like SaaStr.
But in the weeks and months following major events like this one, and as insights drive actions, and sales and marketing efforts begin to pay off and the business grows, you have to shift that focus to begin thinking about long-term financial operations and goals. SaaS financial operations are anything but basic, which is why our team has prepared a guide to walk you through the key financial metrics you should be capturing to grow your business today and eventually, satisfy and impress potential investors in the future. I capture the essential highlights of what you’ll need to make this impression below:
Realize that the Old School Approach Will Fail Every Time
If you’ve underestimated the importance of solid financial operations for both short and long-term success, you’re not alone. But, it’s not too late to set the course straight. As a CEO, accurate and real-time financial metrics are extremely important for a couple of reasons. First, they allow you to make informed decisions that are driven by insight. Second, they will ensure that when you’re ready to seek capital, you can provide the metrics and insight into the financial health of your business that investors and VCs will, without a doubt, expect.
Without the right financial operations and solution in place, you’re stuck making important business decisions based on anecdotal or inaccurate information and thus, to investors, your business looks like a risky investment. This ultimately will lower your valuation and make it extremely challenging to effectively raise capital.
To get your financial operations headed in the right direction, it’s first important to understand that traditional metrics, accounting software and approaches aren’t suited for the dynamic SaaS recurring revenue model. Because most robust finance systems that address 100% of what SaaS businesses need are very expensive and simply out of reach for the majority, the typical response has been to cobble spreadsheets together with traditional accounting software to create homegrown SaaS financial operations. If you are doing this today, you’ll soon learn that this approach won’t work for long and here’s why:
- The more spreadsheets you create to supplement accounting software, the more you’ll need to manually manipulate data
- The more you manually touch the data, the greater the risk for error
- Spreadsheets are disconnected and an error in one calculation can have a devastating domino effect
- This approach will not scale to meet your needs as the business grows.
Spreadsheets are powerful tools, but they are poorly suited for managing a recurring revenue SaaS business. If you rely on them for too many processes, your financial operations are going to suffer. Before long, you’re stuck in the spreadsheet vortex and can’t get real-time metrics, don’t trust the data and your numbers are inconsistently defined.
If you’re slow to deliver numbers, think about the message this sends to potential investors. Not to mention, what happens when you finally turn the numbers over and they contain inaccuracies, are difficult to inspect and don’t hold up under scrutiny? This equals risk in the eyes of investors and will make negotiating very difficult because they will do everything they can to control that risk.
To be successful, you need four main things:
- An understanding of the key metrics you should capture and why.
- A subscription management solution that will make it easy to capture that information and will scale to support the financial operations of your business as it grows.
- Quick access to those metrics and the high-quality financial information so you can make smart decisions, properly manage your business and eventually, raise capital with confidence.
- GAAP financials that, when combined with those metrics, provide the insight and financial maturity you need to successfully run your business and raise capital.
As CEO, you are often the last to learn about the heroics your financial operations team has been pulling to keep pace with your growth. My advice is to spend some time digging into your processes. If your team is stuck in the spreadsheet vortex, you will likely be very surprised (and disappointed) by what you learn. They are probably dealing with multiple, disconnected tools and expending a lot of manual effort to keep everything moving. You don’t have to turn this into a Six Sigma exercise, but you should try to find the constraints and identify quality problems.
To continue reading, download the complete CEO Guide to SaaS Financial Metrics.