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The ultimate success of high ACV SaaS startups is tied directly to the CFO building the right model and financial system
Growing a successful subscription-based SaaS startup requires business strategies that further highlight the importance of a strong CFO – one who can lead the company with data, insights, and planning around pricing, revenue growth (ARR), happy customers (minimizing churn), annual contract value (ACV), momentum or velocity of growth, efficiency (CAC), and cash flow.
How do CFOs best step-up to the challenge?
Many of you head up the finance team at a high ACV business and face this particular challenge which is the focus of our latest webinar, Planning High ACV Billing and Revenue Recognition Models, featuring Vinny Prajka, Partner at JMI Equity.
JMI Equity is a growth equity firm focused on investing in leading software companies. JMI partners with exceptional management teams to help build their companies into industry leaders. And in our webinar Vinny shares insights from his experiences helping software companies grow, and in particular the role finance teams play in enabling that growth.
The CFO role is unique, and as we look at the challenges of the CFO to lead a high ACV subscription business, one thing becomes clear – manual, error-prone, spreadsheet dependent tools that lack automation, artificial intelligence, forecasting and scenario planning capabilities are holding you and your business back.
A great financial management system can work wonders
But there’s another side to this puzzle that needs work – your business model. If you aren’t already familiar with SaaS Metrics, make sure you catch up on How SaaS CFOs use SaaS Metrics to grow their Subscription businesses.
Your subscription business needs to focus on creating value in the eyes of your customers. If you customers are happy, they’re likely to stick with you and continue to pay subscription fees. A big part of this relates to your pricing model and how you charge your customers. Is your pricing based on a flat fee, determined by usage or a tiered structure? How frequently are you going to invoice your customers – monthly, quarterly, annually? Do you have add-ons, service fees, or other charges? These all become important considerations for a variety of reasons.
Fundamentally, it can be viewed in terms of the value your customers perceive. And the health of your business can be measured through your SaaS Metrics – CMRR, CAC, Churn, CLTV, and Cash Flow.
Our goal at Sage Intacct is to take out all the inefficiencies in the manual, tactical work CFOs are bogged down with to open up more time to focus on the strategic challenges that directly affect the viability, growth, and success of your subscription business.
What are investors like JMI Equity looking for in terms of a great investment?
First and foremost, it’s how quickly the SaaS software business can grow subscription revenue, tracked through ARR (annual recurring revenue) or MRR (monthly recurring revenue).
Then they consider the quality of the business, measured by retention. Over the years will these customers continue to buy more? And how efficiently can portfolio companies bring on new customers as demonstrated by low acquisition costs and CAC ratios, like CLTV to CAC.
If you’re creating and selling value, then over time you should be able to increase your deal sizes.
Additionally, to capture JMI’s attention as a potential investor, it’s a good idea to demonstrate the following:
- Very strong product market fit
- Leader in a category
- Good fundamentals such as high retention
- Happy Customers and referrals (virality)
What does a great Automated Billing system look like?
Look to establish a flexible, automated, subscription-centric (contract-based) billing system to see revenue, billings and financials in one spot – through the contract. You’ll also want built-in support to handle more complex usage-based subscriptions as well as services, upgrades, hybrid models, maintenance and other common entries that make subscription billing difficult for order-based systems.
As you grow, the ability to handle different types of revenue streams and billing provides more flexibility to innovate, differentiate and maximize CLTV. Usage billing provides strong value to customers since they pay according to how much they consume, but you’ll also be able to support subscriptions, services, and even perpetual billing models.
Using the contract as the single source for revenue, billing and financials, you can manage a single revenue stream and automatically recognize revenue throughout the customer lifecycle.
And contract changes, including renewals, up-sells, down-sells and holds, drive automatic updates to revenue recognition, billing, and your financials. With an automated, flexible solution, you’ll be able to get bills out faster, decrease days sales outstanding, and free up cash to grow your business
What to look for in a revenue management system
Look for an automated end-to-end subscription revenue management system with ASC 606 compliant revenue recognition including blended revenue models and multi-element arrangements.
As revenue grows, your financials need to be GAAP, ASC 606 and IFRS 15 compliant – it’s important to use a solution built for recurring revenue vs. orders.
Order-based solutions present challenges to getting a single view of your revenue recognition across unbilled, billed, and paid because data resides in different places. With a contract-based solution, all this information comes from a single source—the subscription contract.
Automating compliance, especially revenue recognition and expense amortization, can save hundreds of hours of time and decrease risk of errors. Plus, you get a full understanding of deferred revenue to guide your valuation.
Make sure your system has the following capabilities:
- Automate unbilled, billed, and paid across different types of revenue (deferred and recognized revenue) throughout the entire subscription lifecycle
- Templates and schedules automatically allocate revenue and amortize expenses for you, even as contracts and subscriptions change.
- Out of the box functionality means you can handle changes through configuration, not scripting – you don’t need to depend on IT or consulting services for support
- All order changes captured in a single contract
- Automatic revenue reallocation for contract changes
- Simplify revenue management with automated revenue recognition and expense reallocation
- Eliminate uncertainty about changing requirements with dual treatment and reporting
- Unlimited dimensions to for detailed insights into product, region, segment, geography, and supporting data
How is Sage Intacct different?
- Offers one native quote-to-cash with Salesforce CPQ
- Is built from the ground up to support ASC 606 and endorsed by the AICPA
- Provides unlimited reporting dimensions
- Can deploy recurring billing across perpetual, usage, recurring, and professional services
- Delivers prebuilt, customizable GAAP and SaaS metrics dashboards
- Enables a view into the future with our forecasting tools
We’ve eliminated the manual, tactical steps to allow you to focus on strategy, guidance, and storytelling to prove your models to investors for your next growth stage.
And our solution is proven and validated by our customers – we’re #1 in customer satisfaction in Accounting and ERP and #1 in Subscription Revenue Management on G2 Crowd.
Here is a great story from JMI Equity portfolio company, Arena Solutions, which recently entered into a definitive agreement to be acquired by PTC, Inc (NASDAQ: PTC).