Did you know that 92% of SaaS companies within the first 3 years of a startup? This statistic is startling because your innovate software may never hit the ground running even if you have spent hundreds of hours developing it. A key reason why many dissolve before they ever begin is due to a series of avoidable finance mistakes.
As a software as a service CEO or developer, it can be difficult to shift your focus on the financial side of your company. Being engrossed in your software that will drastically shift the SaaS world and solve customer problems is entirely normal. However, if you do not pay attention to these potential mistakes in your company’s early days, you could be doomed.
Our team has listed the 6 most notorious SaaS finance mistakes you could be making in your startup. After hearing why they are detrimental, you can save your SaaS business a lot of heartache later.
1). Lacking a Company Budget
“Your direction, not your intention, determines your destination,” said Andy Stanley, a New York Times Best Selling Author and communicator. One easy way to tell whether your SaaS company is going downhill is whether there is a clear budget in place. If you’re not careful, you can spend money needlessly and dry your investor’s SaaS financing funds.
For example, you can get so excited about product development that you throw too much into payroll and testing. These costs are necessary for future success, but they will dig your SaaS startup an empty grave when it exceeds your budget. It is there as a financial safety net to sustain life-long company health, not inhibit business acceleration.
You can also allocate more funds to one department and less to another without a proper budget, which can prevent effective growth. Some departments, such as marketing, are crucial to getting your product seen. But when you actually need to spend dollars back at the drawing board, you forget vital financial priorities. A specific budget prevents these mishaps from occurring if you follow it.
2). Not Putting P&L’s into Practice
Putting your Profit and Loss Statement (P&L) into practice will make or break your startup’s finances. If you’ve never heard of P&L’s or left them on your deskside, your software company will be in trouble.
These financial statements show a revenue and expense overview for a specific time, which complements and informs your budget. There are several other detailed metrics, such as Gross Profit, Net Profit, Operating Costs, etc., that the P&L tracks that can help you nail down company spending.
Regularly printing out your startup’s P&L during each growth cycle is the first step to avoiding an SaaS disaster. But if you never put it into practice, you are cheating yourself and the software you’ve dedicated your life to perfect. We advise hiring a CFO or financial advisor, if you don’t have one already, who can provide actionable steps to your unique startup.
That way, they can bridge the gap between your fantastic product and wise financial counsel, so your company doesn’t get thrown into the wayside. We recommend taking as much due diligence into your P&L as your software product.
3). Jumping the Gun with Accrual Accounting
Many ambitious early-stage SaaS companies adopt accrual accounting when they are not ready, which is a common mistake you could (or are) fall into. If you’re not familiar with the difference, it depends on when your finance department recognizes revenue for the company.
For cash-based accounting, you log revenue when a customer pays you, but you don’t have revenue recognition until after expenses are billed with accrual accounting. Your startup cannot realistically embrace accrual accounting because it is not a mega-corporation like Slack or Mailchimp yet. That SaaS business model requires current success while you may struggle to find funding.
As difficult as it may be, this finance mistake may mean swallowing your pride as a CEO and accepting your startup status. Your company can spiral to the ground if you jump into accrual accounting too quickly.
4). Running off Monthly Billing
Monthly billing may not be a SaaS startup finance mistake, depending on your specific business, industry, etc. In general, annual billing is best-suited for the SaaS company model, and your monthly plans could be leading to future disasters.
Month-basis subscriptions may be more convenient for your customers to try your software if they have doubts, but they, in turn, drive up churn rates. More customers will drop off the map if you give them the option. And this will not provide a steady, expected income that will accelerate your business growth.
An annual plan, although it asks for more commitment, will retain the kind of committed, loyal customers you want. These are the users at the bottom of the sales funnel who are most likely to recommend you to their business network if they rave about your product. Then, you will have the opportunity to make major financial gains rather than settle for mistakes.
If you currently opt for a monthly subscription to access your software, you will miss out on these financial benefits:
- Annual billing encourages upfront payment and improves cash flow
- Increases predictability of revenue
- With only one invoice, you’ll do less financial reporting
- Reduces the cost of accounting
5). Forgetting Your Company’s Taxes
This error may seem like an obvious trap your SaaS startup can fall into, but you can forget taxes in the software production grind. They may feel like an extra hassle you have to pay someone else to do but will lead to your company’s failure if you neglect them. And the finance mistake doesn’t just lie in filing your taxes, but rather filing your taxes away.
When you create a budget and analyze routine P&L’s, accounting for taxes is crucial since these documents all impact each other. Not only do you want to find out what your business location’s tax regulations are, how to file your taxes as you bill customers, etc., but you need to execute your taxes in your overall financial strategy.
Benjamin Franklin is famous for saying that, “If you plan to fail, you are planning to fail.” If you do not have the bandwidth to file and account for taxes, you sabotage your company. Financial experts, such as a CFO or account, can assist you so you do not make this preventable finance mistake.
6). Letting Down Employees with Payroll
Finally, you can drop the ball with compensating your employees if you’re not careful, which reduces their trust in your financial leadership. These can include miscalculating or not tracking hours, delaying promised paydays, and delivering an incorrect wage. Not only does your credibility as a company diminish, but they have little reason to believe you can pay their next paycheck.
You are at a disadvantage, being an SaaS startup with a new product, and they are placing themselves into a risky situation already. However, you can avoid this finance mistake and avoid a staff walking out on you by utilizing a reputable payroll platform. Workday and Hubstaff, for example, can ensure your employees receive the wage you promised them and increase their confidence in you and your company.
Grow Your Business with Sound Financial Decisions
Keeping these common SaaS finance mistakes in mind, you can look at your startup and see whether it is in danger. We listed several reasons why you should not fall into them, which will keep your company from being the 92% of failed SaaS founders. In general, taking inventory of your small business’s finance practices will provide direction for the future and accelerate your business growth.
Our company has many successful SaaS business CEOs that would be glad to answer your finance questions. We can hear your company story and troubleshoot these and other mistakes so you don’t have to fall into them and attain customer success with your software.