Here, finance manager at webexpenses, Bernard Crumlish, reviews the challenges of using the subscription based software licensing model, software-as-a-service (SaaS), for entrepreneurs looking to implement the model into their startup.
One of the most common terms that I come across at work today is SaaS. We all know the impact that cloud technology has had on the business world, from micro companies to some of the largest tech companies. Indeed, the webexpenses delivery model was born from this technology and our licensing is based entirely on a subscription basis.
For small businesses in particular the SaaS model can create great opportunities with its flexibility, however there are also some challenges that businesses should be aware of within the early stages of adopting this model.
The technology and delivery models are not the only profound changes for businesses, SaaS metrics are fundamentally impacting the role of the finance team for businesses of all sizes.
To understand the changes for your small business, let’s first look at the traditional GAAP (Generally Accepted Accounting Principles) model. This primarily relies on the business making the next sale, each month and year the business starts a clean slate, the team looks to build the revenues again from £0. Payments are generally collected at the point of purchase and in terms of financial reporting we look at retrospective revenue for the previous period.
After sales support is a cost to the traditional model but a customer is often tied in for extended periods, based on their initial investment they are seeking a longer term return on investment. Forecasting and valuation are both estimated based on previous period performance, the finance function does a lot of looking back.
So how is SaaS different?
SaaS startups are notoriously difficult, but not unsuccessful. As the business is generating market interest, it will be incurring costs and it must do so before it can start generating sales. The challenge is then managing the “J Curve”.
Any sales will be based on a deferred revenue basis so a company will only invoice and recognise on a monthly/quarterly basis. It will take 12 months from the point of delivery before a company is able to recognise the associated first year revenue.
Cash flow can be a major headache. Sources of finance are expensive and can be difficult to obtain.
For micro and SME companies cash flow is a primary concern, so when considering an SaaS metrics model it is important that as a business owner, you are aware of the challenges you may face in that first year.
Ensuring you have a solid understanding of the subscription model is necessary so that you’re able to see the long term benefits of this form of investment and to develop the key areas of your business that will help to increase your customer bases, such as customer service.
Are you an entrepreneur looking to start a business in the SaaS model? Read on to find out the rest of the SaaS journey for startup firms.
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