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4 Cash Management Tips for SaaS Startups

Cash is king. In business, everything stems from the cash you have, the cash you earn, and the cash you raise. You need it to run every part of your business. How much cash you have determines your company’s runway, and how likely you will raise the next round.

At Lighter Capital, we sometimes see great companies with promising traction, but the entrepreneurs are presented with less than ideal funding options because they didn’t fully understand how to manage their cash. To help you operate better and be in a better position for fundraising, here are four cash management tips we find most useful for tech and SaaS businesses.

1. Manage your customer’s prepay

Prepayments are great. Your customers are basically helping you finance your business. Look at what Tesla just did with their Model 3 preorders. They received 325K preorders for $1000 in the first week, and won’t deliver a car for over 1.5 years. That’s like receiving a $325M loan interest free for 1.5 years of preproduction from its clients.

However, two things you should pay close attention to when it comes to customers’ prepay—returns and long stretches to the next renewal.

You should have enough cash on hand to prepare for returns or cancellation, if you are using accrual accounting, you can track this liability in an unearned revenue account.

If your renewal cycle is long, you need to think about keeping your customers happy and sticky with your product for the entire renewal cycle. This can be challenging depending on your offering and market. For most of our clients that are in the B2B enterprise software space, having a team or program dedicated to customer success and retention is important.

2. Manage your account receivables

Instead of customers’ prepay, if you allow your clients to pay on 30, 60, or 90 terms, you are essentially financing a loan to them on trade credit for that period of time.

Unfortunately, often we see small SaaS businesses’ receivables age well past the net terms when selling to large enterprise companies. Big companies know that it can lean on its payables since the small SaaS vendor needs to keep its large client happy.

Manage your receivables carefully. Don’t put yourself in a position where you have to take on expensive debt for working capital because you have outstanding A/R.

3. Keep your physical assets light

For traditional businesses, cash can be generated during rough times from reselling long-term assets, such as equipment parts or inventories. That’s not the case for SaaS companies. For these businesses, long-term assets usually mean furniture, computers, and servers. These assets depreciate overtime, and in other words, this is really a cash sink.

Many early-stage startups feel the pressure to create a nice office environment with lots of fun extras for recruiting purposes. But ask yourself if the foosball table, flashy monitors, and candy wall is the best use of your company’s cash. Will it really increase your employees’ productivity?

4. There is always a lag in ROI when deploying new capital

When deploying new capital, pay special attention to your cash and runway. After raising a round, many entrepreneurs start focusing all their attention on growing the business. And while they’re focused on that growth curve, they forget to monitor their cash position closely.

Remember, there’s almost always a lag between deploying the cash and when you start seeing the return on the investment, such as new hires. It may take a while to find the right hire and your new employees likely will take three months to ramp up. It can take a few iterations to launch that new product and the market adoption of the product may take a while. When you deploy new capital, your expenses will go up, and your top line revenue likely will take some time to catch up. Don’t overlook this gap. Monitor your cash position and runway closely so you can adjust your strategy quickly when projections don’t match the actuals.

In a market where startup capital is drying up, cash will make or break your company. Monitor it closely and spend it wisely.