Today we are going to talk about positive cash flow, and starting a business often involves a significant financial investment. Even for the most resilient, savings accounts are raided, loans are taken out and profits have to continually be pumped back into the business to keep it going.
There is a lot at stake in the choice of sales model and the ability to enroll customers in payment plans and keep them. The SaaS model requires upfront subscription payments, but that doesn’t necessarily mean the business is cash flow positive, even if it’s growing quickly.
What is positive cash flow?
Positive cash flow means you have the capital to create more growth opportunities and can maintain the basic needs of your business, like paying your team and keeping the lights on.
For simplicity, let’s take a company with a single bank account through which all money flows directly. Therefore, you will have two types of flows:
- incoming cash flows (cash in, customer payments)
- outgoing cash flows (expenses related to your activity)
It is in the interpretation of these flows where there will be material for analysis.
There are two main limitations that apply to all companies:
The accounts must always be positive (if the money goes out faster than it comes in: commercial credits, late collections, etc., then you have a problem)
Investments must be financed with the company’s available funds.
Importance of having positive cash flow
Having positive cash flow indicates that the company is creating wealth in the form of liquidity, which is very reassuring for a bank or investors. In fact, this liquidity can be transformed into dividends and remunerate shareholders. Banks will feel comfortable knowing that your company will be able to repay a loan because it generates a surplus each month.
It is not necessary to have a business that generates cash flow in the short term, but in the long term you should aim to generate this income.
If your cash flow is negative, you must have the necessary liquidity to support it and plan investments: capital contributions or medium or long-term debts that allow you to finance this phase, which will lead to a cash surplus situation in the future. future.
Another way to interpret this result is to note that positive cash flow implies a negative need for working capital, which is another indicator of the good health of your company.
Tips for having positive cash flow
Here are 6 tips to help generate positive cash flow for your SaaS business:
1. Keep costs low
One of the things that can affect profit margins and reduce cash flow for SaaS startups is their spend. It’s the kind of thing that can drag down businesses unless close attention is paid to tracking expenses.
When examining monthly and quarterly financial statements, keeping a close eye on expenses (and overspending) is a critical part of managing funds. A common problem is investing too much capital in sales and marketing expenses early on.
Try to figure out where you can cut costs and pinpoint areas of your business that may have increasing costs that you need to address as your business grows.
The more in tune you are with your finances, the more likely you are to achieve positive cash flow.
2. Try the freemium model
For some SaaS companies, harnessing the power behind the psychology of “free” has paid off in terms of rapid growth and positive cash flow. It may be risky, but it’s always worth trying as part of your growth strategy.
The freemium model (free + subscription) gets people to sign up to use and fall in love with a product without limitations and at no cost to them. Once users have tried and found value in a new product, they are more likely to upgrade so they can use the full set of premium features.
If your brand targets a broad market, the chances of moving someone from the free version to the paid version increase considerably.
If you can target enough users with the freemium model at a fast pace and figure out how much to give for free and what to withhold for your upgraded plans, it’s possible to move to a positive cash flow state at a faster pace.
3. Business companies
Companies with enormous budgets have the financial means to pay an annual bill up front. They may even be happy to pay several years in advance. These clients can provide significant amounts of cash to boost your business in the early stages, when you need it most.
The other advantage is that once companies are up and running with your product, they are less likely to switch to the competition. They’ve invested a lot financially and technically, and the downtime and hassle of having to search for another product may be more trouble than it’s worth. The result is large-scale recurring revenue.
4. Annual payments
Encourage your subscribers to sign up for an annual account instead of a monthly one. This is a popular option for many SaaS companies. You will often see pricing pages where the subscription price is 10% less for an annual plan than for a monthly plan. This can be enough motivation for customers to make the option that saves them money in the long run. It’s a win for them, and a win for you.
You can offer an even deeper discount for multi-year subscriptions. For example, paying two years of cash up front is a significant bonus when you are trying to generate positive cash flow for your business.
5. Customer retention
Paying attention to retention is one of the easiest and most cost-effective ways to keep your SaaS revenue more stable. The cost of customer acquisition is an ongoing expense that quickly eats into your startup capital. Leveraging the customers you already have for predictable recurring revenue can offset that.
If a customer is dissatisfied with your service, you can bet they are thinking about canceling their account, losing both recurring revenue and the cost of acquiring them.
To ensure that your customers are getting the full value of your product, it can be as easy as checking by email or phone from time to time. Ask them if they have any questions or concerns, or if there is anything you can do as a company to serve them better.
Following up with your customers before they make the decision to leave is one of the most important things you can do as a SaaS startup to ensure your finances are as stable as possible.