As CFO, you’re largely responsible for the strategic direction that your company takes. Does your business have the right infrastructure, processes, and technology to support your global strategy?
In our work with hundreds of subscription companies, we have the opportunity to see exactly what successful CFOs do and where they’re invested. Here we’ve boiled it down to the top 5 priorities that SaaS CFOs need to focus on:
Billing, reporting, payments, rev rec—these can get very complicated for subscription businesses with all the variables. What’s your system for managing this work?
Manual work is time-consuming, inefficient, and prone to errors. Not to mention bad for keeping headcount down…and bad for employee morale for the poor drones who are stuck in spreadsheet hell and battling outdated legacy systems all day long.
Does your billing system perform complex calculations for usage billing and take into account a wide range of pricing rules?
Do you have a smart payment system that knows when to retry credit cards for the right reasons (e.g. when it has failed for insufficient funds, but not when the account is closed)?
Can your payment collection system automatically send payment notifications and cancel services?
To handle revenue recognition, are you just taking billing amounts that you’ve sent out and trying to figure out how much you need to recognize each month, or do you have a system that automates rev rec?
If you haven’t automated whatever functions can be automated and optimized workflow to address the particular needs of your subscription business, that should be your number one priority. Operational efficiency must be a main focus for all SaaS leaders.
For a great example of operational efficiency, take Zendesk, a long-time Zuora customer. Initially they had a homegrown billing system that couldn’t handle customer events such as expansions and upgrades. This meant that Finance was constantly tied up looking at invoices and re-updating information, and Engineering had to spend development time valuable time adding new features and packages. Today Zendesk has the flexibility to innovate and iterate with products, marketing, pricing, and promotions all in one central location. This takes the burden off of Finance and Engineering and increases their operational efficiency.
Learn more about Zuora Central, the world’s only subscription order-to-cash platform to manage and automate your dynamic order-to-cash process for greater operational efficiency.
How’s your company doing?
In the Subscription Economy, there’s an entirely new set of metrics to keep you up at night, and leveraging traditional financial models like gross profit, net margin and EBITDA just won’t cut it.
SaaS CFOs need to keep their eye on core metrics like MRR, ARR, churn, net retention rate, CLV, days outstanding in sales. But while you need these metrics to assess how your company is doing, they are unfortunately quite difficult to calculate—especially if you’re relying on spreadsheets with its unreliable data from disparate systems and custom, complex formulas.
Leaders use data to drive decisions and uncover new opportunities. Zuora customer Zoom is a great example of a SaaS business that does this well. Zoom relies on its deep insight into customer usage to help identify upsell opportunities and build strategic upsell paths. And you can tell, by their growth, that what they’re doing is working: in 2016, Zoom announced 215% YoY growth in usage and, by 2017, 650,000 businesses were on Zoom.
So how do you access these essential metrics?
You need a dependable system—one that will automatically calculate these metrics and in which you can trust that the numbers are accurate. You shouldn’t have to come up with complex calculations when the board is demanding insights into the financial health of your business. You should have these metrics available at the touch of a button so that you can continually keep your finger on the pulse of your business.
Learn more about The 3 SaaS Metrics that Matter and how to calculate them.
As your company grows, it becomes harder and harder to increase revenues exponentially. The complexities—both in implementing growth strategies and reporting on growth—are so important for the modern CFO whose role and team hold more responsibility in approving, forecasting, and reporting.
In working with hundreds of SaaS companies, we’ve learned that the solution to sustaining a high growth rate is to diversify your approach to growth and embrace these 10 core growth strategies.
1. Tailored product editions
2. Upsell path
3. Cross-sell strategy
4. Usage pricing
5. Pricing & packaging optimization
6. Self-service sales
7. Assisted-sales model
8. Expand into the enterprise
9. International expansion
10. Strategic acquisition
Each of these growth strategies is important and has its place in the overall growth strategy of a SaaS business, but you can’t just tackle all 10 strategies simultaneously. You need to target efficient growth.
Zuora customer DocuSign is a great example of a leading subscription business successfully executing on multiple growth strategies. They were able to maintain rapid growth (135% YoY growth in users!) by executing growth strategies including new pricing plans and cross-selling new solutions into new markets. Pick any successful SaaS business, and you’ll be able to see multiple growth strategies in play.
Read more about the 10 Essential SaaS Growth Strategies including more about Zendesk and other star company examples—and how to master each strategy.
How are you planning on supporting growth? Relying on additional headcount to scale is extremely expensive, and requires a ramp period. As your company grows, is the answer to just keep adding to your accounting team? Is your plan to hire X new accounting people for every X new customers you add?
At some point, extra people are just a band aid. When people hire for more roles to fix a manual problem, it’s just a short-term mask for specific issue—not a long-term scalable solution that can be replicated across the lifetime of a company.
Zuora customer BetterCloud provides a great example of a company that is smartly building their business to scale. They went from zero to a thousand customers in the first month of going live with a self-service model with immediate billing and a platform for customers to self-manage their accounts. When the business grew beyond the self-service model, they integrated systems and standardized across new sales, renewals, expansions, and upsells with 100% electronic quoting. This automation allowed for lean finance and billing teams, ensuring that when they were ready to grow their sales team there would be no systemic limitation to doing so. They also integrated and upgraded their financial processes to support revenue growth which led to a 4-5 day typical accounting close, supported by two and a half FTEs.
To future proof and build your company to scale, you need to put processes in place that don’t limit your potential growth and that prevent the need to try to hire away the problem. This goes back to the priority of automation. More automation, less manual work, less need for band aids, greater ability to 10X+ your business without incurring the 10X cost of increasing your finance team.
Learn more about the operational challenges of Scaling Subscription Sales and Billing Operations.
Ready or not, the new accounting standards around revenue recognition practices ASC 606 and IFRS 15 are going into effect soon. Nonpublic entities are required to apply the new standards for annual periods beginning after December 15, 2018 (while December 15, 2017 is the effective date for public entities). This means you still have some time, but you definitely don’t want to wait until 6 months out before you start working towards compliance. According to Bloomberg, “The revenue standard is one of the biggest accounting changes in over a decade. It will impact every industry and is applicable to every company.” CFOs need to understand the new guidance, how it will impact their business, and what they need to do to prepare.
Currently, requirements for reporting revenue—which is a critical metric used to evaluate a company’s financial performance—vary across industries, jurisdictions, and markets. The new standards are based on one overarching principle: Companies must recognize revenue when goods and services are transferred to the customer, in an amount that is proportionate to what has been delivered at that point.
Companies based on a subscription model face a particularly difficult challenge in being compliant with these new standards.
Best practice is to use a tool that handles the complexity of rev rec by automating management of revenue and aligning it with your other finance applications. Worst practice? Trying to manage this complexity in spreadsheets.
Start by designing a set of rules for how you want to recognize revenue. This should include revenue distribution rules, performance obligation rules, and more. Then assign these rules to each of your offerings. With the right system, revenue contracts, performance obligations, allocations, and revenue distribution will then happen automatically.
Read more in ASC 606 & IFRS 15: How the New Revenue Standards Will Impact Subscription Companies.