Growing your Software as a Service (SaaS) business will be one of your biggest challenges but also one of your most satisfying.
Whether you’re at that point already or need some understanding of how startup finances increase in complexity, we’ve got the answers and more, so read on.
Here’s what we cover in this article:
The different growth phases
When growing your startup, there are different phases of growth that you should understand. In the beginning, these are:
- Pre-Seed Stage
- Seed Stage
- Early Stage
- Growth Stage
The focus of this article is the Growth Stage.
If your startup is at this point, it’s helpful to reflect on the journey so far.
You’ve made it past the Pre-Seed and Seed Stages, where you’ve validated the startup business model with the market and won initial finances to support your SaaS service or product.
You’ve even conquered the Early Stage—where turning your startup into a fully fledged business is a real possibility. You may have spent money on marketing and product development.
Because the business was new, you probably didn’t have the resources to cover operational costs, so you could have turned to investors.
You released the product or service to the market, and customers have made purchases because of its price and quality.
You’ve proven your revenue model by making sales.
Well done. Now what?
The Growth Stage
Usually, the Growth Stage is when the business is profitable.
You’ve figured out the product, market, and capital needed to scale. There’s a definite demand for the product, and you’re confident you can win new customers and keep existing ones.
It’s where you need to focus on accelerating sales.
The Growth Stage is where you need to prove you can retain the customers you’ve won and sell them additional bits on top.
You must provide evidence to investors that the business model is working, and customers are spending money from you a second, third time and so on, and not hitting the stop button.
This is where it gets financially trickier for a SaaS startup.
Although the SaaS business model and subscription-based cloud software offer great opportunities, finances run differently from traditional businesses.
All that juicy financial SaaS data needs tracking, which becomes even more complicated when the volume and complexity of your subscriptions increase.
Without automation, it can turn into a bit of a nightmare.
5 methods for handling startup finances
We can get deep into the dirty financial detail, but for now, let’s keep it simple and talk about five tried and trusted methods for handling startup finances from Early Stage into the Growth Stage.
And you can use modern cloud financial software to track your finances too.
1. Integrate your systems for quote-to-cash
Quote-to-cash (QTC) is the name given to all the stages from a customer expressing interest in your product or service to that lovely cha-ching when money flows into your account.
The processes between where your sales team creates a quote and the proposal to where you receive payments for the services you provide are carried out by people in different parts of the business.
The systems used by the sales team and account managers might be separate from those used for order fulfilment, which might be separate from the systems used for billing and account receivables.
Sales can be a complex process that touches each of these areas.
With a SaaS startup, the aim is to remove any friction within the sales process, tying sales and financial data together to get one version of the truth.
2. Establish flexible contract-based billing
As a SaaS business, you deduct payments from customers repeatedly for the services or products you offer.
At the Growth Stage, you’ll want to adjust your service and billing terms to fit changing market and customer requirements.
Expanding products or services to attract new customers and keep existing ones allows you to increase your pricing.
Successful SaaS businesses have flexible billing systems because there are various ways they might want to bill customers.
Business to business (B2B) customers might get great value from usage pricing where they only pay for how much they use.
In contrast, customers will find it easier to understand simple monthly flat fees in the consumer world.
3. Build end-to-end revenue management
SaaS financial practices and auditing is more complex than traditional businesses.
Sooner or later, due to growth, your financial systems need to be ready for scaling up recurring revenue, which is different to a traditional order-based business.
Seed Stage startups often start managing their financial operations with spreadsheets and traditional accounting software.
But at the Growth Stage, managing recurring revenue for a growing customer base means hours upon hours of manual work.
Automation is critical here, as it eliminates the need to enter data manually, saving you bucketloads of time.
4. Build real-time GAAP and SaaS dashboards
Automatically connecting contracts to billing, revenue management, and the general ledger can supply you with both Generally Accepted Accounting Principle (GAAP) and SaaS metrics, both of which are critical to Growth Stage businesses.
GAAP metrics tell where you have been and where you are now, while SaaS metrics say where the business is going.
Look for real time and on-demand visibility to help you make immediate and strategic decisions without spending ages compiling the correct data.
5. Forecast the future
Tie financial systems with sales data to automatically generate forecasts, which can help guide decisions that make your business a success—such as hiring and product investment.
Final thoughts: Use financial metrics to scale
When you’ve found a product and market fit, you must know how to build a repeatable and profitable sales process that you can scale as fast as possible.
Remember this—the Early Stage and Growth Stage are dangerous points in the life of a startup.
Without the numbers, you’re working on gut feeling, and the finances of SaaS businesses are too complicated to take that risk.
By following our five points (there’s more nitty-gritty detail in our downloadable guide), you’ll have the power to avoid some of the financial pitfalls you’ll encounter growing a SaaS business.