As a technology entrepreneur, you’re no doubt familiar with the acronym SaaS, which stands for “Software as a Service,” a model that offers access to software as a subscription rather than for purchase. While this concept is increasingly popular, it does present certain challenges. In this series of articles, our tech advisors look at the financial challenges inherent to this model and identify possible solutions.
The challenge
Although growth is a good problem, it is still a colossal challenge in terms of financial management. In reality, managing a fast-growing business requires the same skills and tools as a company that is having significant financial difficulties, because in both cases, they are constantly facing a lack of cash flow—a reality exacerbated by the tightening of capital deployed in Tech since late 2021.
For companies operating under the SaaS model, this challenge is even greater, as subscription-based pricing implies a longer investment recovery time due to the lack of synchronization between revenues and expenses.
There are pros and cons to each of the existing pricing models. Since each company’s service offer and growth objectives are different, the pricing model chosen is key to positioning it against the competition, maintaining or increasing their ability to acquire new clients and/or retaining and increasing their sales to existing clients.
Possible solutions
Here are some best practices to deal with this challenge:
- Always have financial projections that include a monthly budget. The budget must be updated based on cash flow requirements, in terms of consumption rate versus available reserves and facilities. The greater the need for cash, the more frequently updates must be made.
- Use different financing products such as subordinated debt, preferred and common shares. Although these tools inevitably have a higher cost, their advantages in terms of flexibility far outweigh the cost disadvantage.
- Ensure you have good support from a financial management advisor.
Please read: Stock basics
Companies that want to use this type of model have a number of key performance indicators they can look at to assess their situation. However, they have to know which ones are relevant to their business.
To get financing that takes into account your recurring revenue model, you can look to our team to guide you through each stage in the life cycle of your tech company.