Cash collections is a topic we haven’t discussed much on SaaStr, but boy it can be important all the way until you have a CFO. And often after.
What’s the issue? The issue is that most SaaS start-ups are terrible at collecting cash that doesn’t come from a payment gateway. Just terrible.
– terrible at collections. start-ups without an A/R function often have $250k-$500k in uncollectible receivables.
– metrics that break and don't make sense. starts to harm you in later fundraising.
– inability to do cohort analyses, or even often, any basic analyses
— Jason ✨𝕊𝕒𝕒𝕊𝕥𝕣𝔼𝕦𝕣𝕠𝕡𝕒✨ Lemkin 🦄 (@jasonlk) February 15, 2019
And they often get worse as they go upmarket. They hook up a payment system when they start as self-service, and the cash magically flows into the bank account. But then they close some bigger customers. And add some services. Both of which require … invoicing. Which are often are paid “Net 30” or “Net 60” or “Net Infinity”. And no one follows up, because there is no finance team to follow-up. The invoice is sent out, and … the start-ups just … wait. And let me tell you, 50%+ of the time, those invoices don’t just pay themselves. You have to follow up. And those great annual deals? The cash that sounded so great from an annual deal just never comes. At least, not enough of it.
Let me suggest a basic KPI and goal — and a warning sign: You need to be collecting at least 100% of your MRR in cash each month. Ideally, 110%+.
How can you collect more than 100% of your MRR each month? It’s pretty easy in most cases. First, annual deals that pre-pay up front should generate right there more than your MRR each month. Second, pre-paid upsells, and conversion from monthly to annual deals will help too. And finally, once renewals come, they will help a lot if they are annual. They will rain cash. So at least collect 100% of your MRR each month. (I set a goal of 110%, and we always hit it. And we got cash-flow positive at $5m ARR, in large part because of measure it and hitting it.)
What I see these days more and more is start-ups not paying attention to accounts receivable, invoicing, etc. and collecting 60%-70% of their MRR. Oftentimes, without even knowing it, because they aren’t tracking the ratio. Even worse, they pay the entire annual sales commission on these deals, without getting the cash. Pay out a lot of 15%-20% commissions on deals where the cash never comes in, and watch your bank account shrink in real-time. Combined together, that’s like effectively only receiving 50% of your MRR in cash each month after paid commissions on unpaid deals.
That’s terrible when cash matters. Just terrible. And it gets worse. As those receivables age, they get harder to collect. You have to write some of them off. Ouch.
Imagine your start-up is doing $100k in MRR ($1.2m ARR), and it’s just starting to all click and work. And you have, say, 20 distributed employees, that with servers all cost you say $200k a month all-in. And $1m in the bank:
- Now if you collect 110% of your MRR in this scenario, and don’t increase your burn much, and pay your sales reps upon cash receipt, are growing say 8% a month … your cash might last 18 months! Your burn here might be about $90k on a net basis (after cash), and likely would go down at that growth rate if you are careful about hiring.
- But if you only collect 60% of your MRR and pay the reps up front, your burn rate here might be $140k a month net (!). All of a sudden, you are down to 6-7 months of runway for your cash.
That’s going from Scary (at 60% collections), Running Out of Money to Don’t Need to Worry (110%) on your cash runway. With the exact same revenue, growth, team, company and expenses!
Fix this now. Fix it today:
- At least, hire someone 4-8 hours a week to do collections. Just A/R. Their only job is to collect 100% of your MRR in cash per month.
- If cash is an issue, pay reps on cash receipt. They won’t like it. But it aligns interest. Later, once cash doesn’t really matter, pay when the deal is Adobe Sign’ed.
- Set a clear, key collections goal of 100%+ of MRR. Make it a Top, Weekly goal for the whole team. Watch it go up once you do.
And watch your runway … run a lot, lot, lot … longer.