SaaS CFO Survival Guide: Managing the Financial Impact of COVID-19

The financial impact from COVID-19 has been substantial and pervasive with many small and medium sized businesses feeling the biggest impact. The current economic conditions have forced founders and business owners across all industries to face the current crisis head on and find ways to keep their businesses afloat.

Many software companies are well positioned to weather the current economic storm. If you are a business that provides mission critical software to your customers, that gives you a clear advantage over businesses that provide products or services that are otherwise expendable in tough economic times. SaaS businesses are even better positioned given the recurring and predictable nature of their revenues. Despite these advantages, as a SaaS founder, you will still want to keep a close eye on your costs and liquidity (ie cash flow).

Tips For Managing The Financial Impact of COVID

In that spirit, I offer up a SaaS CFO survival guide for managing the financial impact of COVID to your balance sheet and cash flow in these challenging times. The three areas to focus on are:

• Accounts receivable
• Accounts payable
• Cash forecasting

Monitoring Your Accounts Receivable

Monitoring your accounts receivable is crucial to understanding your future cash flow situation. Most accounting systems have a report you can generate called an “Accounts Receivable Aging.” This report will show you outstanding invoices by customer. I would urge you to review this with your sales and customer service teams (whichever group is focused on customer collections) on at least a weekly basis (depending on your situation, daily may be necessary) and use the report as a tracking mechanism for how well you are collecting your receivables.

You will want to look at your current customers and make your best estimate of who is at risk of not paying for the next six months. You will also want to arm your collections team with options they can use to keep your customers on a payment plan. This could include the option of suggesting downgrades to certain “at risk” customers to retain revenue and minimize churn.

The key message to your sales and customer service teams should be “do everything and anything you can to retain our current customers.”  

As much as you can, accelerate your receivables. I recognize this may be difficult to execute if some of your customers are struggling to manage their own financial impact of COVID. The following options are levers you might think about pulling to improve the pace and probability of collection:

• Asking new customers for a deposit or partial payment upfront
• Sending invoices early and more frequently
• Making it as easy as possible for clients to pay (for example, setting your customers up with an electronic payment method such as an ACH to receive funds faster versus encouraging customers to write a check for payment)
• Offering a discount if customers pay in advance of the terms

You will need to balance your desire to keep cash collections flowing with your customer’s desire to reduce or stop cash outflows. If you have a good relationship with your customers, you should be able to find a common ground. Remember, how you show up to your customers in times like these can go a long way towards their long-term retention and the longevity of your business. 

Managing Your Accounts Payable

Managing how and when you pay your vendors is another important factor in the success of your overall cash flow management. Similar to what we discussed with your receivables, I would consider creating a list of all of your vendors and the spend you have had with them over the past twelve months. I would go through each vendor, starting with the largest, and formulate a strategy as to what you want to ask of them in terms of discounts, deferrals, etc.

How to Negotiate Rent

For example, one of your biggest areas of spend may be rent. There are several paths you can take when approaching your landlord about a discount or deferral of monthly rent:

• If you have a security deposit that is more than one month - you could ask your landlord to apply a month or two against the security deposit (if the deposit is for multiple months)
• You could also offer your landlord to extend the life of your lease two or three months in return for not having to pay rent the next two or three months.
• Another option would be to ask to defer rent for several months with the promise to pay slightly more over the rest of the lease period to cover the months you didn't pay rent. 

How to Negotiate with Vendors

The key here is to be creative and don’t be afraid to ask for what you want. With vendors other than your landlord, rather than paying your invoices immediately, try negotiating temporary net-30, net-60 or even net-90 payment terms. Doing this will allow you to conserve cash by extending your payables. Even a small extension or delay can give you some much needed wiggle room on cash flow.

Know that while these conversations are hard, you are not alone. We are all experiencing the difficulties and hardships from the current coronavirus pandemic and resulting economic impact. Your vendors are going to want to keep you as a customer just like you want to keep your customers. This means there is a high likelihood that many of them will be flexible and work with you to find payment terms that work for both you and them.

Cash Forecasting for Your Business

Now that you have a game plan around accelerating receivables and stretching your payables, the next step is to put together a cash forecast for your SaaS business. A cash forecast is simply an exercise in tracking your cash inflows (ie revenue) and cash outflows (ie costs). 

Regarding your inflows, my advice is don’t underestimate the impact this crisis will have on your revenue. Now is not the time to be liberal with your revenue growth forecasting. In a worst-case scenario, assume new bookings slow to zero, churn increases, upgrades shrink and downgrades increase.

Realistic financial planning now will help you make informed decisions about your business.  

Remember that there is a difference between recognizing revenue (ie when it is billed) and collecting revenue (ie when the cash is received). You will want to create your cash forecast based on when you expect to receive cash from your customers. This is why focusing on the collection of your accounts receivable, as mentioned above, is such an important exercise.

When it comes to your cash outflows, I suggest thinking about them in terms of two buckets: non-headcount and headcount. 

Non-Headcount Costs

For your non-headcount expenses, prioritize costs that are mission critical and generate revenue and consider putting a freeze on, or heavily cutting, the rest of these expenses.  

There are 5 key areas to consider when evaluating your non-headcount costs:

1. Eliminate all non-essential travel. In the case of novel coronavirus, this was a given in the short term due to travel restrictions. When travel restrictions lift, it’s likely you’ll need to reassess what’s considered essential and what can be eliminated.
2. Evaluate every lease and assess termination clauses. As we discussed above, do not be afraid to ask landlords for relief and be prepared to negotiate. If they won’t allow a full deferment, can you negotiate reducing payments by 50% in the short term? And consider a larger question - how is your workforce handling remote work? Can your team transition to full time remote work at some offices, permanently eliminating office expenses? There’s a lot to be learned here about the way of working and what’s considered essential.
3. Rigorously evaluate the efficiency of your marketing spend. New revenue generation is likely to be minimal so you can (and should) reduce your marketing investment to match expectations. Do you have a large conference budget? Those aren’t happening so move that money somewhere else. To be clear - the message here is not “stop marketing” but rather “how can you ensure your marketing spend is efficient?” It’s not a great time to invest in testing new channels. Rely on what you know works and scale back on experimentation.
4. Examine software licenses and subscription, recurring charges and eliminate non essential ones. This might be tied to your marketing reevaluation - are there software platforms you’re no longer investing in and can pause recurring payments?  
5. Assess ancillary benefits and scale back where it makes sense. Do you have budget allocated to company events? Or benefits to new hires (technology, swag, etc.). Understanding that we may be in a tough economic situation for the foreseeable future (events won’t be happening this year and you’re likely scaling back on hiring), there’s potentially some money to be saved and reinvested here.

When assessing non-headcount spending, be sure to identify what can be cut immediately versus what can be cut if the current state persists. You want to be thinking about balancing fiscal responsibility in the short-term while avoiding permanently handicapping your business in the long-term when we get to the other side of this crisis.

Headcount Costs

In most SaaS businesses, payroll is the biggest expense lever. Good talent is both necessary and expensive. As a leader, it’s your responsibility to do everything in your power to protect your employees before considering headcount reductions. Your business will make it to the other side of this and you’ll need an A+ team to keep winning. The goal is to balance taking care of your people to the best of your ability while positioning your business to be able to endure through the current environment and yet be in a position to resume growth once we get past the current crisis. Not an easy task by any means.

When making decisions on payroll, you typically have three choices: 

1. Layoff
2. Furlough (unpaid temporary leave of absence but can retain their health benefits)
3. Continue to pay your employees in full

Before we get too far here, I feel compelled to recommend that you always consult your HR leader or an employment attorney when it comes to the treatment and compensation of your employees. These decisions affect the bottom line, but they also affect your people.

When assessing your headcount costs, the ideal option would be to retain your full team.

There are a number of options to consider that could allow you to make meaningful reductions in headcount costs without having to make layoffs.

These include: 

1. Limiting hours across the board instead of cutting jobs (i.e. cut everyone's hours / salaries by X% for a short period of time).
2. Furloughing workers. This option has recently become more attractive to employers (and employees) based on the additional benefits paid to furloughed workers under the CARES Act (discussed in more detail below).
3. Reducing or eliminating bonus structures/targets
4. Reducing company benefits like learning and development allowances, employer’s portion of 401k contributions, employer’s contribution towards healthcare premiums

These won’t be fun items for you to share with your team but if doing so means everyone gets to keep their jobs then it may be necessary, and your employees may ultimately be thankful you took this approach in the long run. At ASG, our companies have taken a mix of creative approaches to retain employees over the long term.

If you have done all you can and you must make job cuts, don’t forget to include severance in your cash forecasting.

Once you have identified the expected amount and timing of your cash inflows and outflows, we suggest creating a rolling 16-week cash forecast. This means that you are forecasting your weekly cash flows 16 weeks (approximately four months) ahead at any point in time. You should think about updating this 16 week outlook on a weekly basis. Taking this approach will force you to have a forward-looking view on cash and allow you to make the necessary decisions now to avoid liquidity issues in the future.

CARES (Coronavirus Aid, Relief, and Economic Security) Act

If you haven’t already, I strongly encourage you to look into taking advantage of the multiple financial relief options provided in the CARES Act passed by Congress to address the economic crisis brought on by COVID-19. This act provides small businesses like yours with access to capital through low interest rate loans, payroll tax credits, deferral of the employer’s portion of social security taxes and other financial benefits. These benefits are designed specifically for small businesses and can be a helpful way to provide your business with additional cash inflows.

Survive the Short Term but Plan for the Long Term

Your goal right now is to survive and make the right short-term fiscal decisions so that your business has a chance to sustain over the long term. You’ll need to think long and hard about what is essential to your business. Prepare yourself for slow to no revenue growth in the foreseeable future. Fight like heck to keep your current customers, and don’t be afraid to ask for payment relief from your vendors. You are in survival mode and must do what you can to keep the lights on and your business running.

There will be an end to this pandemic. With a few hard decisions now, you can maintain your business and put it in a position to come out the other side of this tough economic environment ready to thrive again.