Practical guide to cash management for SaaS

What is cash management?

Cash represents the money available at a given moment for a company. Managing your cash flow means managing your company's liquid assets, whether they are in the cash register or in the bank. 

Good management often involves the ability toassess the working capital requirements (WCR) of the operating cycle, i.e., the money available to cover current expenses. 

For a SaaS that has raised funds, cash management can also mean identifying and controlling its runway. Finally, cash management can also mean the activity of investing a company's cash in the best conditions of profitability and risk.

The ultimate goal of cash management is to ensure the short-term solvency of the company. It is necessary to ensure that cash levels remain satisfactory and that the company is able to meet all its deadlines and does not default on payments.

How to manage your cash flow when you are a SaaS?

The financing needsare important for the development of SaaS. Indeed, in the seed phase, a SaaS designs and develops the service it thinks it will offer to its customers and does not collect any money. During the commercialization phase, the company starts to register monthly or annual subscriptions but still needs cash for its marketing and communication expenses.

To manage the cash flow of a SaaS, it is necessary to adapt to the particularities of the development of this type of company and to follow the cash flow with rigor. Cash flow management implies to have forecasting management tools in order to evaluate the immediate and future financing needs of the company.

A good cash flow forecasting tool allows you to have visibility on the cash flow situation and to understand the financial dynamics of your company. The purpose of a forecasting tool is to control your operations, pay your suppliers on time and invest when necessary in durable assets, software, hardware, etc. These tools allow for better decision making since they allow for operational decisions to be based on tangible and easily understandable financial elements. 

What are the pitfalls to avoid?

Establishing a rigorous cash flow budget is therefore an essential tool for managing the cash flow of a SaaS. With this financial forecast, it is possible to quickly visualize the periods when supplier payment becomes difficult. You can see the gaps between the growth of revenues such as ARR or MRR and the immediate need for cash to pay salaries and daily expenses.

The cash flow forecast is a good way to anticipate the future financial situation of the company and to judge the feasibility of a project. However, you must be careful to take into account all indicators in this budget. Indeed, if a cash flow item is missing, the whole analysis will be distorted.

What are the best practices?

Once the right cash management tools have been set up, certain actions that are more or less simple to implement can optimize the company's financial dynamics . In SaaS companies, the levers are mainly located on the customer and supplier items, since stocks are non-existent in this type of activity. 

Focus on recurring revenues such as ARR

Promoting annual subscription offers to customers provides recurring annual revenues, limiting the risks associated with subscription cancellations. This type of revenue allows for a better cash flow projection.

Monitor key indicators

It is important to monitor certain key KPIs and to act quickly if they deteriorate. Working capital requirements, corresponding to the cash flow needed to finance the company's operational cycle, are among the items to be anticipated to avoid getting into difficulty.

Churn rate is also one of the most important indicators for SaaS companies. It measures the percentage of customers who terminate their contract per period and thus influences the cash flow forecast. It is necessary to contain this rate by understanding the reasons of disinterest of customers and readjust its commercial offer.

Which tools are suitable for cash management in a SaaS?

An Excel spreadsheet

It is possible to create a cash flow tracking table in Excel or Google Sheets. 

Once you know the period and the projection you want to study, you must identify all the incoming and outgoing cash flows to be taken into account. The amounts entered must also be as precise as possible. 

If certain positions are difficult to anticipate, it is possible to use estimates , but be careful to remain consistent with the evolution of the activity. For example, if the situation lends itself to it, it is possible to include the remuneration of one or more new employees in the projection.

A cash management software

Less laborious than a spreadsheet, especially if there are a large number of invoices to be taken into account, cash management software is a popular solution for managing and analyzing cash flow. In addition to offering an automated follow-up thanks to a synchronization of the tool and the company's bank account, these software offer numerous functionalities and allow to push the analysis. 

A very promising new cash management software has just been launched on the market: Irma. Irma is an intelligent and automated cash flow management and forecasting solution for freelancers, VSEs and SMEs. Its high-performance tool allows you to anticipate your cash flow with precision and reliability and proposes concrete actions to optimize your WCR.

Easy to use, the software connects directly to your invoicing and ERP tools in order to quickly and efficiently predict your invoice payment dates. Irma's little plus: its software allows you to overcome any possible uncertainties regarding your expenses. Once your APIs and banking data are securely connected to the software, Irma categorizes your banking operations in order to forecast your future VAT, all with a real time vision of your budget.

If you want to manage your cash flow simply, quickly and efficiently, Karmen recommends Irma 100%.

Why and how to finance the cash flow of a SaaS? 

Depending on the need and maturity of the organization, digital companies most often resort to love money, business angels, grants, crowdfunding and fundraising. Binding financing solutions such as bank loans are often not suitable for digital companies because they do not have tangible assets.

Venture capital and fundraising are also often essential steps for digital companies. However, they are increasingly turning to Revenue Based Financing, in search of easy access, fast and non-dilutive financing.

Revenue Based Financing is an innovative, non-dilutive financing tool that provides cash flow based on a company's current and future revenues.

Revenue Based Financing (RBF) funds are transmitted on a virtual card that makes it easy to take control of the cash flow. The process is digitalized and fast: in only 48 hours, a company can receive funds.

The consideration to be paid is not an interest rate, but a percentage, usually around 4 to 6% per year, of the company's future revenues. The amount of the monthly payments is calculated according to the company's monthly financial results. The amount is therefore flexible, unlike the monthly payments of a bank loan.

The company that received the cash pays the investor back monthly over six, nine or twelve months. 

With Karmen, French digital and e-commerce companies benefit from a 100% non-dilutive, digitalized and fast financing solution(in less than 48 hours!). 

Several products are available from Karmen to best meet your needs. The Karmen offer provides you with rapid cash flow and enables you to finance your growth efficiently.

If you're feeling the cash crunch when it comes to your working capital requirements, we recommend you take a look at the Karmen

To find out if you are eligible, it's very simple! Connect your company's financial tools in read-only mode throughopen banking to our algorithm. Our objective is to analyze your company's potential objectively based on current and future revenues. 

Then, if you qualify, we will send you a loan offer within 48 hours. There are no hidden fees. If the offer suits you, you will receive the first one at the end. 

Conclusion

Thus, establishing a good cash flow management is crucial for SaaS. There are several tools and reflexes to optimize the monitoring of your cash flow. Karmen is the solution for Revenue Based FinancingKarmen is an innovative financing solution based on the future revenues of project owners. It is a type of financing called non-dilutive (there is no transfer of capital in exchange) recommended for digital and Software-as-a-Service (SaaS) startups.