A SaaS Guide to Cash Flow

May 20, 2020

There are two incredibly important questions that every SaaS founder should know the answers to:

  1. When does our company run out of money?
  2. When does your company become cash flow positive?

Although there are plenty of unknowns that play into answering these two questions in the early days of your business (especially when the early days of your business are clouded by a global pandemic), it’s still incredibly important to have a general sense of the answers–even in your early days. The way you do this? Financial modelling! When you’re coming up with your financial projections, cash flow is a huge part of it...literally a third of it! Here’s more information on cash flow statements, why they matter, and a few cash treatments every SaaS company should be aware of.

Intro to Cash Flow Statements

A Statement of Cash Flows or Cash Flow Statement is a summary of the cash entering and leaving your company. Pretty straightforward! This document is one of three crucial financial documents for any company, the other two being the balance sheet and the income statement. Here are a few things a cash flow statement records: 

Cash Inflow - All of the money coming in to your company from subscriptions and services

Cash Outflow - All of the money being paid out of your company for both tangible and intangible assets

Net Cash - The money left after taking your liabilities out of the equation

Why You Should Care

Cash flow statements are particularly important to SaaS companies for a couple of reasons:

  1. It gets you funded
  2. Helps dig into details (and save you money)
  3. Helps you plan for multiple scenarios

Things To Know About Cash Flow

Not all cash is equal, especially in a SaaS business model. When a combination of subscriptions and services come into play, you’ve got a lot of different ways that cash can be noted in your cash flow statement. Here are a few accounting principles that will help as you set up your SaaS cash flow statement:

Depreciation - the concept that tangible assets held by your company may lose value over time. Think: a new laptop you purchased in 2016 isn’t going to be worth as much now as it was then. Depreciation is noted on a cash flow statement under net income, and is calculated by estimating the amount of time the asset will be used by the company (in the case of the laptop, let’s say 3 years) and spreading the total cost of that laptop over that amount of time. 

Amortization - the concept that intangible assets held by your company may lose value over time. Think: a trademark you purchase for your product’s name may be for a 10 year period of time, which means the value runs out over the course of the 10 years. Like depreciation, amortization is noted on a cash flow statement under net income, and is calculated very similarly–in the examples of the trademark, you would evenly spread the total cost over the course of 10 years. 

When Is Your Business Cash Flow Positive?

Obviously, a universal goal of every business is to be cash flow positive, meaning the amount of money your business is bringing in is exceeding the amount that you’re spending. So the day you become cash flow positive as a business should be one of HUGE celebration! 

Cash is king, no matter what is going on in the world, so you should be sure to have the best handle possible on how much you’ll have coming in, and when you’ll be able to celebrate that fateful day when your business become cash flow positive. And when you do, we’ll be throwing confetti right alongside you!

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