What is positive cash flow?
Launching a SaaS startup can often mean a significant financial investment. Even for the hardiest of bootstrappers, savings accounts get raided, loans are taken out, and any profits need to be continually pumped back into the business to keep it moving.
There’s a lot riding on your choice of sales model and your ability to sign up customers to paid plans and keep them there. The SaaS model requires subscription payments up front, but that doesn’t necessarily mean the business is cash flow positive – even if it’s growing rapidly.
Positive cash flow means you have the capital to create more opportunities for growth and can keep up with your basic business needs – like paying your team and keeping the lights on.
It can take the average SaaS company six years to reach a true cash flow positive status. We take a look at some of the ways you can speed up the process. Here are 6 tips to help generate a positive cash flow for your SaaS business:
1. Keeping your costs down
One of the things that can strangle profit margins and decrease cash flow for SaaS startups is their spending. It’s the sort of thing that can creep up on companies unless close attention is paid to tracking expenses.
When you’re looking at your monthly and quarterly financials, keeping a close eye on your spending (and overspending) is a critical part of managing your funds. A common problem is investing too much capital in sales and marketing expenses at an early stage.
Try to figure out where you can cut costs and pinpoint any areas of your business that might have rising costs that you need to address as your business grows.
The more in tune you are with your SaaS finances, the better chance you have of achieving positive cash flow.
2. Testing the Freemium model
The freemium model (free + subscription) gets people signing up to use and fall in love with a product with no limitations and at no cost to them. Once users have tried, tested, and found the value in a new product they’re more likely to upgrade so they can use the entire suite of premium features.
If your brand targets a large market (like Spotify and Dropbox) the opportunities for moving customers from free to paid increases substantially.
The average conversion rate from a freemium to paid plan is 4% – Dropbox sits in this range. Spotify, on the other hand, boasts a 26.6% conversion rate. Out of 75 million customers on their freemium plan, 20 million of those are now paying customers.
If you can target enough users with the freemium model at a rapid rate and figure out how much to give away for free and what to hold back for your upgraded plans – it’s possible to move to a cash flow positive state at a faster rate.
3. Enterprise companies
The other benefit is that once enterprise companies are up and running with your product, they’re less likely to switch to the competition. They’re deeply invested financially and technically, and the downtime and hassle to churn out and find another product can be more trouble than it’s worth. The result is recurring revenue on a healthy scale.
4. Annual payments
You could offer an even more substantial discount for multi-year subscriptions. A 20% discount across two years can turn heads for your customers, and as you’ll still be growing as a business during that time it won’t feel like you’re taking an immediate loss. Two years’ payment of cash up front is a significant bonus when you’re trying to generate a positive cash flow for your business.