Running a successful company requires SaaS founders and executives to keep many plates spinning — from operations and production to sales and marketing to product development. The list goes on and on.

But one of the most important (and often overlooked) aspects is managing the flow of cash and customer payments. After all, selling products or services is great, but you need customers to actually pay their bills to keep the lights on! While cash sales are ideal, rarely do B2B or ongoing services transactions occur without issuing a bill or invoice. 

One useful metric to track how well your company is managing accounts receivable is the accounts receivable turnover ratio. In this blog, we’ll explore what accounts receivable turnover is, why it’s an important number to know, how to manage your accounts receivable, and how to calculate it using a simple formula.

What is accounts receivable turnover?

The accounts receivable turnover ratio measures the number of times a company can turn its accounts receivable into cash over typically one year. It calculates how efficiently a business is collecting payment for goods and services delivered on credit. 

A higher turnover ratio indicates the company is quickly converting amounts owed by customers into cash flow available to pay vendors, employees, and other operating expenses payable by the business. Simply put, the accounts receivable turnover ratio measures how well and how fast you get paid by your customers.

What is a good accounts receivable turnover ratio?

A high accounts receivable turnover ratio is desirable as it indicates frequent and efficient collection of receivables. However, an “optimal” turnover ratio really depends on your company’s industry and current financial ratio. Setting your goals too high could place undue pressure on your customers to pay their invoices in advance and result in late or missed payments. 

So, when you’re evaluating your business’s target ratio, keep your current ratio in mind — you want to ensure you have sufficient cash flow to cover any liabilities or monthly expenses in the case of missed or late payments.

Average accounts receivable turnover by industry

No two industries are the same. For example, different industries have varying expectations and norms for how quickly they convert receivables into cash. And understanding how your accounts receivable turnover ratio stacks up against industry standards is crucial for assessing your business’s financial health. Here are some average accounts receivable turnover ratios across industries:

1. Retail

Average Turnover Ratio: 9 times per year

Retail businesses often have higher turnover ratios due to frequent cash sales and shorter credit terms. For example, a study by the Credit Research Foundation found that the retail sector’s receivable turnover ratio can range from 8 to 12 times annually, depending on the specific market and economic conditions.

2. Construction

Average Turnover Ratio: 8 times per year

The construction industry typically deals with larger projects and longer payment terms, which can lead to a slightly lower ratio. According to Deloitte’s 2022 Construction Industry Report, the average turnover ratio in construction companies fluctuates between 7 and 9 times, reflecting the project’s size and client payment behaviors.

3. Manufacturing

Average Turnover Ratio: 7 times per year

Manufacturing companies often extend credit to maintain good customer relationships, which can slow down collections. A PwC survey highlighted that the manufacturing industry’s turnover ratio averages around 6 to 8 times, influenced by factors like supply chain efficiency and customer credit policies.

4. Healthcare

Average Turnover Ratio: 6 times per year

The healthcare sector faces unique challenges with insurance claims and patient billing, often resulting in a low ratio. The Healthcare Financial Management Association reports an average turnover ratio of 5 to 7 times annually, as healthcare providers navigate complex billing cycles and reimbursement processes.

These industry averages provide a helpful benchmark but remember, they are not rigid targets. Each business has unique circumstances that can affect its receivable turnover. Factors such as customer base quality, credit policies, and economic conditions play significant roles in shaping these ratios.

By comparing your accounts receivable turnover to these industry benchmarks, you can gauge where your business stands and identify areas for improvement. For instance, if your retail business has a lower ratio significantly below 9 times, it might be worth investigating your credit policies or collection processes to identify potential inefficiencies. Similarly, a construction company with a high AR turnover ratio well above the industry average might be doing an excellent job managing its receivables, signaling strong credit control and efficient collection practices.

Accounts receivable turnover ratio formula

Now that we’ve explained the theory behind accounts receivable turnover, let’s attach some numbers to it. The formula to calculate accounts receivable turnover is as follows:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Net Credit Sales: This is the total revenue from products and services sold on credit during a period of time, minus any returns, allowances for damaged goods, or other sales credits issued. To calculate it, take your total net sales for the period and subtract any cash sales to arrive at net credit sales.

Average Accounts Receivable: This is the average amount of receivables owed to the company over a period of time. You can calculate this metric by adding the beginning and ending accounts receivable balances for the specific period, then dividing by two.

How to calculate the accounts receivable turnover in days

The accounts receivable turnover in days shows the average number of days it takes a company to collect payment from its customers. It provides an estimate of the company’s collection period or how long funds are tied up in receivables. The formula is:

Accounts Receivable Turnover in Days = 365 days / Accounts Receivable Turnover Ratio

A lower number of days is preferable, as this indicates the business is collecting from customers quickly.

Accounts receivable turnover ratio examples

Now that you understand the turnover ratio calculation, let’s go through some more hands-on examples to see how the accounts receivable turnover ratio can provide insight into a company’s financial health and collection efficiency over a specific accounting period.

Example 1: B2B SaaS company with $5M ARR

Acme SaaS Company is a B2B accounting software firm that sells $5 million in services annually to a customer base on 30-day credit terms.

  • Total net sales: $5,000,000
  • Cash sales: $2,000,000
  • Sales allowances: $50,000
  • Beginning AR: $500,000
  • Ending AR: $450,000

Acme SaaS Company’s accounts receivable turnover is 6.32 times. This means they are collecting payments from customers around every 58 days on average.

While this turnover rate is decent, it means that their customers are taking longer than the 30-day term to pay invoices. The higher ending receivables and slower turnover could indicate inefficient collection processes or trouble with certain customers paying late. 

This ties up Acme SaaS Company’s working capital and cash flow. Not good.

To solve this issue, Acme SaaS Company would want to look at automating reminders for past-due invoices and consider moving their customers to COD terms if late payment is a frequent issue.

Example 2: Manufacturing company with $2.5M in annual revenue

Manufacturing Corp is a manufacturing company with these revenue and AR numbers:

  • Net credit sales: $2,500,000
  • Beginning AR: $300,000
  • Ending AR: $350,000

Manufacturing Corp’s accounts receivable turnover is 7.69 and their turnover days is 48 days. This indicates they are collecting from customers more rapidly than Acme SaaS Company in the previous example.

The faster turnover ratio demonstrates efficient receivables management — customers are paying well within Manufacturing Corp’s 60 day terms. Their working capital is also not tied up unnecessarily in receivables, allowing them better cash flow for operations and growth.

While Manufacturing Corp’s collection processes are effective, they could still consider offering discounts for early payment to bring turnover days even lower.

What is the significance of the accounts receivable turnover ratio?

Why does the AR turnover ratio matter exactly? First of all, it’s an important metric for assessing the financial health and efficiency of a company’s credit and collections processes. A higher ratio indicates the business is efficiently converting receivables into cash flow — this improves working capital availability to fund a company’s operations and invest in growth.

A good target is a high accounts receivable turnover ratio between 5-10 times yearly. This demonstrates the company has high-quality customers and conservative credit policies. The business collects quickly from customers within payment terms. Meanwhile, a low AR turnover ratio below 3 times yearly could signal problems. More specifically, it means that the company’s cash is tied up in receivables due to inefficient collections or customers defaulting on payments. The business may need to tighten credit policies, follow up on late invoices quicker, or offer discounts for early payment.

What is the difference between accounts receivable and accounts receivable turnover?

While these two terms sound similar, there’s actually a pretty big difference. Accounts receivable refers to the total dollar balance owed to a company by its customers who purchased goods or services on credit. It represents an asset on the balance sheet reflecting money that customers have committed to pay the company in the future.

On the other hand, accounts receivable turnover is an efficiency ratio that measures how many times a company can collect, or “turn over,” its average accounts receivable balance during a period. It assesses how many times receivables are converted into cash over time. While accounts receivable is a static dollar amount, accounts receivable turnover evaluates the relationship between a company’s receivable balance, its collection policies, working capital management, and sales.

Why you should be forecasting and modeling your accounts receivable

If you want to start improving your AR turnover ratio, the logical next step is to set up a forecasting model.

In addition to monitoring current turnover metrics, developing robust forecasts for future accounts receivable activity is crucial for effective financial planning and cash flow management. Rather than relying solely on point-in-time turnover ratios, you should leverage historical receivables data to identify relevant trends, cycles, and patterns that can inform projections. And with tools like Maxio’s accounts receivable aging report, you can easily drill down into these metrics and uncover any pain points that are hurting your AR turnover ratio.

Once you get your hands on these metrics, analyzing any seasonal fluctuations that correlate with monthly, quarterly, or annual cycles can provide insight into anticipated timing of customer payments. Then, examining the historical differences in payment behaviors across customer segments, industries, or geographies will also allow you to model distinct payment patterns that are tailored to your unique customer and revenue mix.

Likewise, factoring in forecasts for sales growth will give your teams guidance into any expected expansion of receivables balances and turnover capacity. And evaluating days sales outstanding (DSO) metrics and accounts receivable aging over time offers perspective on average collection periods to model going forward.

A few ways to improve your accounts receivable turnover ratio

Improving accounts receivable turnover requires an ongoing, multi-faceted approach. 

You should start by reviewing your credit policies and carefully evaluating criteria for new customers, credit limits, and payment terms. Tightening policies even incrementally for higher-risk segments can pay dividends in reducing late or missed payments from your customer base. Automating your collections through dedicated SaaS AR software is another impactful strategy — features like Maxio’s automation of invoice reminders, tracking of past-due accounts, and streamlined workflows can significantly boost your finance and accounting team’s ability to collect on late or missed payments.

Then, once you have access to these AR tools, your employees who are responsible for AR should incorporate dunning best practices and follow up diligently on any invoices approaching 30 days past-due. A quick check-in call, email, or letter to high-value customers can get payments back on track before they become seriously delinquent. And offering discounts for early payment, such as a 2% discount for payment within 10 days, provides customers with an incentive to pay ahead of schedule.

Get payments in the door with Maxio

Managing accounts receivable efficiently is vital for healthy cash flow. Otherwise, outstanding debt and bad debt will tie up your working capital and strain your operations. And to make matters worse, this isn’t a problem you can tackle using Excel alone. Manual tracking in spreadsheets is both time-consuming and prone to errors. Even one small data entry mistake could cause your model to crumble and make your investors question their confidence in your company.

Fortunately, there are tools like Maxio specifically designed for B2B SaaS companies to streamline their accounts receivable at scale. A sneak peek at some of Maxio’s key features include automated invoicing, real-time tracking of outstanding debt, payment reminders, integration with existing accounting systems, and customizable reporting (just to name a few).

Want to start improving the AR turnover in your company? Check out our AR page for more information.

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Learn all about the one tool companies use to manage delayed payments and mitigate potential damage to their cash flow: the Accounts Receivable (AR) Aging report.

There’s a reason most late payments are rewarded with fines: cash is king, and companies need to know when they can expect to be paid. The longer a bill remains unaddressed, the higher the risk of nonpayment. In this post, we’ll discuss companies’ primary tool to manage these delayed payments and mitigate potential damage to their cash flow: the Accounts Receivable (AR) Aging report.

What is an accounts receivable aging report?

The AR aging shows due dates (and past–due dates) of unpaid customer invoices. This table helps you visualize how many invoices are outstanding and which are past due. It is an important financial reporting tool for business owners to track outstanding balances.

The accounts receivable aging report summarizes how much a customer owes within specific date ranges, often 30-day increments as of the report date. By sorting unpaid invoices into date ranges from the invoice date, it helps gauge the collectability of a company’s receivables. This supports essential collection functions, allowing you to prioritize contacting customers with older invoices first.

Logically, if your customers signed a contract with you, there was an intent to pay, and a significant delay between invoicing and payment is often a sign of big problems (customer financial instability, product quality issues, implementation delays, etc.). After all, delaying cash outflow is a customer’s final lever when things aren’t going well. Monitoring accounts receivable aging is critical for tracking the total amount due and past due invoices.

Benefits of reviewing accounts receivable aging

There are quite a few benefits to your company keeping an AR aging or AR aging report:

First, aggregating aging data across customers in the report lists allows you to assess the risk within your accounts receivable balance. If a customer’s average Days Sales Outstanding (DSO) is rising, it’s time to evaluate their contract’s payment terms and credit terms.

If many customers’ DSO are trending upwards, revisiting credit policies (think interest, late payment fees, or early-payment discounts) should be in your future. This allows clients to review and plan to pay their invoices within the aging categories or specific period outlined in the report, which can be especially helpful to smaller businesses with potential cash flow problems.

Additionally, reviewing the accounts receivable aging will help you identify potential delays in the company’s cash flow by uncovering credit risks. By seeing these risks in the report, you can take preventative measures to protect yourself from more risky customers.

AR aging reports also allow you to make strategic decisions about the collection process. For instance, if your customers aren’t paying until the 60-90 day mark, it’s time to consider new collection methods or maybe even enlist a collection agency.

Finally, the doubtful accounts information in an AR aging report shows your company’s receivables that may need to be written off to the company’s bad debt expense.

How to create an AR aging report

You can’t possibly improve your company’s cash flow without first understanding its state, right? That’s why you need an AR aging report ready. Throughout this section, we’ll take you through each step in creating an accurate AR aging report for your business.

Collect unpaid invoices/outstanding invoice data

The first step in creating an AR aging report is collecting all unpaid invoices’ data. 

This includes gathering information on any outstanding invoices past their due date. Be sure to include the invoice date and due date for each unpaid invoice. Suppose you don’t already have this information at the ready. In that case, you may need to pull this data from your accounting system, customer invoices, or other sources that contain the invoice date and due date for all outstanding customer balances.

For example, with Maxo, you can access all your unpaid invoice data in one place with the relevant dates. This allows you to accurately categorize invoices into the appropriate aging buckets when creating your report.

Maxio’s Accounts Receivable interface

Maxio’s Accounts Receivable interface (Source)

Calculate the number of days past due

Once you’ve gathered all unpaid invoice data, the next step is to calculate how many days past due each invoice is. To start your calculations, you’ll first want to look at the due date for each unpaid invoice and compare it to the current date—the difference between the due date and current date will tell you how many days have passed since that invoice was due. 

Filter and categorize invoices by aging

Once you’ve calculated the number of days past due for unpaid invoices, you can begin the nitty-gritty work of filtering and categorizing them into aging buckets. You can do this manually or with a platform like Maxio. You can automatically sort these invoices based on your predefined criteria.

That being said, some of the common aging categories are current, 1-30 days past due, 31-60 days past due, 61-90 days past due, and 90+ days past due. 

Once you’ve sorted your unpaid invoices into these aging categories, you can easily see the distribution of those that are past due. This will make it easier to prioritize your dunning process and reveal any collection risks and past-due trends you may need to address.

Create an aging schedule

Alright, time for the final step! Once everything is organized properly, you’ll want to create an aging schedule that summarizes your categorized invoice data. 

As previously mentioned, your aging schedule should have columns for each aging category: current, 1-30 days, 31-60 days, and 90+ days (these are the most common categories). Adding up the amounts across these aging categories for each customer will give you visibility into who has significant outstanding invoices and where you should focus your dunning and collection efforts.

Now, what if you don’t have the ability to create an accurate aging schedule? For example, if your company is experiencing rapid growth and your accounting department can’t handle the growing number of invoices you send each month, you may need some dedicated tools to help.

Rather than managing everything in a spreadsheet, you could use Maxio’s Accounts Receivable report to track your customers’ outstanding balances and credit balances. This report breaks down outstanding balances into invoiced amounts, payments, and refunds. Similarly, credit balances break down into prepayment balances and unapplied credits. 

Or, if you still prefer a spreadsheet, the CSV export allows you to see all of these elements and their corresponding details, including customer information, transaction dates, days outstanding, and days overdue.

How to use your AR aging report

Creating your AR aging report is only 50% of the work needed to get a better hold on your company’s cash flow. Once that’s done, you’ll need to start extracting the data inside to avoid unwanted revenue leakage. Here’s how you can use your new AR aging report to do just that.

Determine your average collection period

One way to use your AR aging report is to calculate metrics like your average collection period—this tells you the average length of time it takes to collect payment from your customers. 

To determine this number, look at the percentage of invoices in each aging bucket on your report. For example, if you have 40% in current, 30% in 30 days, 20% in 60 days, and 10% past 90 days, your average collection period will be roughly 51 days. Tracking this metric over time with each AR aging report allows you to spot trends and see if your collection period is improving or worsening.

Manage and prevent cash flow problems

Once you have a solid grasp on your average collection period, you can use the AR aging report to help avoid potential cash flow issues. Look for customers with large invoice amounts in the 60+ day aging buckets, as they’ll signal possible problems collecting. Then, reach out to those customers immediately to expedite the payment and collections process. 

You can also use the receivables report to have strategic conversations with your customers about improving their current deal terms or providing discounts when they make early payments. Ultimately, being proactive is the name of the game, and regularly monitoring your receivables aging will allow you to spot potential problems and adjust your collection practices as needed.

Estimate bad debt & allowances

The AR aging report can also inform how much you need to set aside for bad debt allowances. 

For instance, unpaid invoices after 90 days or more may need to be written off if the customer’s financial health is declining. You can also review accounts with substantial balances in the 120+ day aging periods, as these will represent the highest potential risk of nonpayment. 

While you continue collection efforts, you should note these doubtful accounts. The total value of these potentially uncollectible aged invoices should guide how much you provision for bad debt expenses and allowances. Regularly updating these estimates based on your receivables aging ensures your financial reporting reflects those collectability risks.

Inform changes to your credit policies

Last but not least, the patterns you spot in your AR aging report should drive updates to your credit policies. If certain customers continually stretch payments past due dates, it may be time to shorten their payment terms or require small payment deposits in advance.

As another consequence, high late payment balances could also warrant interest charges on overdue invoices. But you don’t need to limit yourself to penalizing customers for late or missed payments. You can also offer early payment discounts to incentivize faster payments and improve your monthly cash flow. 

If many customers pay around the same delayed timeframe, what this really signals is that your standard credit terms need reevaluation. Let your receivables’ aging shape the evolution of your credit policies over time to protect profitability as market conditions and customer behaviors change.

How to improve accounts receivable aging

Ultimately, the best way to reduce the aging of your company’s accounts receivable is through diligent collection and follow-up efforts. 

Automating dunning—communicating with clients with outstanding payments—can streamline these collection efforts. This communication can take many forms, including emails, in-app notifications, or automated phone calls through your accounting software.

While automated dunning is the first and most effective means of improving your AR aging, it’s not the only strategy. Implementing automation and accounting software can help maintain healthy cash flow by keeping up with accounts receivable aging. Check out Maxio’s AR Management Playbook to learn more ways to reduce AR aging and increase your cash flow through additional automation and streamlined collection efforts.

Aging AR report FAQs

What is a good AR aging percentage?

There is no single ideal aging percentage, as it depends on factors like your industry and credit policies. However, a good goal is having 70-80% of invoices within 30 days to maintain a healthy cash flow. Anything over 10-15% past 60 days warrants reviewing credit policies and follow-up on customer payment trends. Compare your metrics to industry benchmarks and watch for increases in older aging buckets, which signal issues to address through payment automation or collection process improvements.

What are the two types of aging reports?

The two main types of aging reports are accounts receivable (AR) aging and accounts payable aging. AR aging reports focus on customer invoices and analyze the length of time customers take to pay bills. This helps inform the collection process. Accounts payable aging reports do the same analysis for a company’s outgoing payments to suppliers. AP aging shows how promptly your company pays its bills. Both reports provide visibility into the timeliness of payments from customers or to suppliers.

What are the aging schedule categories?

A typical aging schedule has columns categorizing invoices by the length of time they are past due. Common categories are current, 1-30 days, 31-60 days, 61-90 days, and over 90 days. The aging intervals help identify issues with cash flow, credit policies, or collections. For accounts receivable aging, older buckets require priority follow-up. For accounts payable aging, longer intervals could mean taking advantage of early payment discounts. The standard schedule categories provide consistency in evaluating the timeliness of payments and receivables.

Is accounts receivable aging required by GAAP?

The Generally Accepted Accounting Principles (GAAP) include procedures necessary for estimating, reporting, and eventually writing off bad debts in a company’s financial statements.

Accounts receivable are listed on the balance sheet as an asset, but your company will eventually be required to estimate how much AR it believes will result in bad debt, and account for it as an allowance for doubtful accounts. The AR aging is the tool you’ll most likely turn to when estimating how much bad debt your company may incur.

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Revenue leakage is a silent threat that can significantly impact an organization’s financial health, eroding profit margins and stunting growth. It is the death by a thousand papercuts for an organization. In the more than 20 years that I’ve spent in finance, I’ve seen how imperative addressing revenue leakage is for maintaining financial stability. Understanding revenue leakage and implementing measures to prevent it is crucial for a robust and efficient financial operation. 

This post explores the causes of revenue leakage, from human error to inefficiencies in RevOps, and presents practical solutions to stop it in its tracks, ensuring your organization remains financially healthy and competitive.

What is revenue leakage?

Revenue leakage refers to the unnoticed loss of revenue within an organization due to inefficiencies, errors, or mismanagement in financial processes. It is crucial to distinguish revenue leakage from churn however. Churn represents lost customers while revenue leakage pertains to lost revenue that could have been retained or earned. This phenomenon can significantly erode profit margins and hinder potential revenue growth, making it a critical issue for any business to address. Revenue leakage often results from lost revenue, inefficiencies, and unchecked manual processes, affecting renewals and causing financial loss.

In the competitive world of B2B SaaS, it’s essential to recognize how revenue leakage can impact your business. When revenue that should be earned is lost due to avoidable factors, it  impacts future growth. This revenue loss could have been invested back into the business for product development, marketing, or team expansion. 

The key to combating revenue leakage is understanding its causes and implementing prevention strategies.

What are the causes of revenue leakage?

Several factors contribute to revenue leakage, each posing unique challenges to an organization’s financial stability. Some of the primary causes include:

  • Human error: Simple data entry, billing, and invoicing mistakes can lead to significant revenue losses. These errors are often due to manual processes that are prone to inaccuracies. For example, a misentered invoice amount or an overlooked billing period can result in substantial revenue discrepancies over time. Additionally, relying on spreadsheets for financial data can be problematic, as maintaining their integrity is challenging and errors can easily propagate through various financial processes, leading to further revenue leakage. 
  • Invoicing and billing errors: Incorrect invoicing and billing can result in either underbilling or overbilling customers, leading to disputes and loss of trust, ultimately causing leaks. Ensuring accurate invoices reflect the correct amounts due is essential for maintaining healthy cash flow and customer relationships. 
  • Fraud: Internal and external fraudulent activities can siphon off substantial revenue, often going undetected for extended periods. This can include unauthorized discounts, falsified refunds, or other deceptive practices. 
  • Wrong pricing strategies: Ineffective pricing models and strategies can fail to capture the full value of products or services, leading to lost revenue opportunities. Misaligned pricing can result in undercharging or overcharging customers, hurting both revenue and customer relationships. It’s also important to be flexible in doing business the way customers want or need. 
  • Absence of collection solutions: The lack of dunning and collection tools to enforce contractual payment obligations and bill late fees can further exacerbate finances. Regularly review your pricing models to ensure they align with your business objectives and market conditions.
  • Incomplete data/reporting: Inaccurate or incomplete data reporting can lead to misinformed decisions and financial losses. These issues can undermine the reliability of financial reports and decision-making processes, jeopardizing the organization’s revenue streams. Understanding how to look at your data and pricing from a strategic perspective can provide valuable insights into optimizing revenue.
  • Lack of standardized processes: Inconsistent processes across the organization can lead to inefficiencies and missed revenue opportunities. Variability in procedures can cause confusion, errors, and delays, ultimately affecting the bottom line. Read our guide on billing management to learn more about managing your billing processes effectively.

These issues can manifest in various forms of revenue leakage, affecting billable hours, customer success, and overall customer experience. Consulting firms often find these problems in the first place during audits, where real-time functionality and data entry discrepancies in CRM systems are prevalent.

How to prevent revenue leakage

Preventing revenue leakage involves a strategic approach that includes identifying sources of leakage, optimizing processes, leveraging technology, and managing contracts effectively. By taking these steps, businesses can stop revenue leakage and protect their financial health.

1. Identify sources of revenue leakage

The first step in preventing revenue leakage is reviewing business and financial operations meticulously to pinpoint areas where revenue might be leaking. This involves scrutinizing financial reports, customer data, billing systems, and compliance processes. Consistently evaluating these aspects and keeping current on SaaS billing best practices helps in identifying inconsistencies and taking corrective actions.

Key areas to review for leakage include:

  • Billing systems: Ensure your billing systems are accurate and efficient. Regular audits of billing systems can identify discrepancies and ensure that all billed amounts are correct.
  • Customer data: Maintain up-to-date and accurate customer data to prevent billing errors. Accurate customer data ensures that invoices are sent to the correct recipients and reflect the correct amounts due.
  • Discrepancies in sales team metrics: Monitor sales team performance metrics to identify and address any inconsistencies. Regular reviews of sales metrics can highlight areas where sales processes can be improved to prevent revenue leakage.
  • Forecasting and underbilling: Regularly review forecasting models and ensure accurate billing practices. Accurate forecasting helps predict future revenue and identify potential problem areas.

A practical method to validate and identify sources of leakage is to “staple yourself to an order.” By following an order from Sales to Operations to Accounting and ultimately to cash receipt, you can better identify misalignments within your organization and areas for process improvement. This approach may also reveal professional services that are rendered but never billed to a customer.

2. Create and optimize SOPs

Documented Standard Operating Procedures (SOPs) are vital in preventing revenue leakage. They help regulate processes, promote clarity, and keep everyone on the same page, reducing inconsistencies and aiding in decision-making. Developing and optimizing SOPs involves analyzing current processes, identifying gaps, and taking detailed notes to ensure every step is covered. Organizing the chaos is key to knowing what levers to push or pull to fine-tune your revenue engine.

Benefits of SOPs include:

  • Standardization: Ensure uniformity in processes across the organization. This reduces the chances of errors and ensures that all team members are following the same procedures.
  • Transparency: Make processes clear and understandable for all involved. Transparent processes also help in identifying areas of improvement.
  • Consistency: Reduce errors and inconsistencies in operations. Consistent processes reinforce reliable outcomes.
  • Informed decision making: Establish that decisions are based on accurate and comprehensive information. Well-documented SOPs provide clear guidelines, ensuring that all actions align with your organization’s goals.

Integrating project management tools in different systems can further optimize these processes, creating dependencies that streamline workflows and strengthen the bottom line.

3. Leverage software automation tools

Leveraging automation tools can significantly reduce the risk of revenue leakage by handling complex and repetitive tasks more efficiently. Automation in revenue management provides several benefits, including:

  • Contract lifecycle management: By automating the management of contracts from initiation to renewal, you can reduce errors and ensure compliance. Automated alerts for renewals and compliance checks prevent contracts from slipping through the cracks, ensuring all obligations are met. Having a contract database with key attributes to score the quality and health of a contract is a foundational element to enhance revenue generation. Scoring based on key elements such as cancellation for convenience, multi-year agreements, and contractual price increases allows management to incrementally improve the value of the contracted install base.
  • Recurring billing: Automating billing cycles ensures timely and accurate invoicing. This reduces the chances of missed or incorrect invoices, capturing revenue accurately and on time. Streamlined workflows deliver a clean billing process.
  • Subscription management: Efficiently managing subscriptions reduces the chances of missed renewals and ensures customers are billed correctly. This seamless handling helps maintain a consistent revenue stream.
  • Revenue recognition: Automating revenue recognition processes ensures compliance with accounting standards and overall accuracy. Using revenue recognition software helps recognize revenue in the correct periods, reduce manual errors, and deliver accurate financial statements.
  • Revenue reporting: Automated revenue reporting systems provide real-time insights into revenue performance, aiding in the early detection of issues. Accurate and timely reports enable better decision-making and help identify revenue trends promptly. Having a process and automation that can look at the revenue/billing streams at the 30,000 foot level and identify trends or blips allows for the drilldown to specific customer and invoice line item detail, ensuring gross revenue leakage is identified and corrected.
  • Revenue projections: Automated tools use historical data and analytics to create accurate revenue forecasts. These reliable projections aid in strategic planning, helping set realistic revenue goals and plan for future growth.

Utilizing these tools helps optimize time tracking, streamline revenue management, and minimize the risk of revenue leakage. Integrations with different systems ensure that workflows are smooth and efficient. Automating these processes also reduces the reliance on manual spreadsheets, further reducing errors and improving efficiency.

4. Properly manage and execute contracts

Mismanagement of contracts can lead to significant revenue leakage. Proper renewal management and execution of contracts involve conducting thorough reviews, ensuring all terms are met, and keeping updated records. Implementing a robust contract management system helps prevent leaks by ensuring all terms are adhered to, renewals are timely, and any discrepancies are addressed promptly.

Effective contract management ensures that SaaS revenue leaks are minimized and team members are aligned on revenue generation strategies. Key aspects of proper contract management include:

  • Regular reviews: Regularly reviewing contracts to ensure compliance with terms and conditions. This includes checking for any discrepancies and addressing them promptly.
  • Compliance: Ensuring that all contract terms are adhered to and that any changes are documented and approved. Compliance checks help in ensuring that all contractual obligations are met.
  • Accurate records: Maintaining accurate records of all contracts, including renewals, amendments, and terminations. This assists in tracking contract performance as well as identifying any areas of revenue leakage.

Managing contracts effectively ensures revenue opportunities are maximized and potential revenue leakage is minimized. It also helps in building strong relationships with customers and partners by ensuring that all terms and conditions are met.

Capping revenue leaks strengthens your bottom line

People, processes, and systems working together are the key ingredients to revenue leakage prevention. By identifying and addressing the causes of revenue leakage, optimizing processes through SOPs, leveraging automation tools, and managing contracts effectively, businesses can significantly reduce the risk of revenue loss. Maxio offers comprehensive solutions designed to help B2B SaaS companies tackle revenue leakage head-on, providing advanced billing, subscription management, and more.

In conclusion, revenue leakage is a critical issue that can significantly impact an organization’s financial health. Understanding its causes and implementing effective strategies to stop revenue leakage can help businesses optimize their operations, improve profitability, and achieve sustainable growth. Maxio provides the tools and expertise needed to address revenue leakage and ensure financial stability for B2B SaaS companies.

Learn how Maxio can help your business stop revenue leakage and optimize workflows by exploring our advanced billing and subscription management solutions. Additionally, for a comprehensive guide on managing renewals effectively, visit our page on renewal management.

By taking proactive steps to address revenue leakage, your organization can protect its financial health, maintain customer trust, and support sustainable growth. Don’t let unnoticed revenue leaks undermine your success—start implementing these strategies today and see the positive impact on your bottom line.

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Revenue Recognition Policy Template

Auditors require lots of documentation to ensure accuracy. Having a solid revenue recognition policy in place is the first step toward ensuring compliance.

It’s not often accounting folks get to wear a cape and be the hero of the story. There just aren’t many fairy tales where a Big 4 CPA turns business operator, revolutionizes the collection process, and gets a day named after them in their hometown. 

But make no mistake, if you see the cash conversion cycle in action – I mean truly RIPPING – it’s nothing short of magic.

Maybe I shouldn’t say “see.” The CCC is something you have to “feel” to truly understand. I experienced its wonders first hand last year. I’m the CFO at a company where we got our Days Sales Outstanding (DSO) down from 55 days to 37 days in the course of a year. That’s an 18 day improvement, or 33%.

And through some shrewd negotiating, we got our Days Payable Outstanding (DPO) up from 35 days to 47

And as a company that doesn’t produce physical widgets, we had no inventory. Our Cash Conversion Cycle was now negative 10 days.

From Tactical Changes to Real Results

What’s the net of it all? As a cash-burning company, this allowed us to hire three more people over the course of 12 months. Those three people happened to be developers, who helped us get new products to market faster, and increase revenues. 

OK, so let’s get tactical. How did we do it?

1. Adjusting Customer Agreements

First, we simply changed our “off the shelf” customer agreement. Every company has one. And it probably hasn’t been updated for… well, a long time.

Instead of 45 days, anyone new was handed a template that had 30-day payment terms penciled in. If they accepted the terms as they were, boom. We were already in the money by 15 days. 

We had long accepted that 45 days was industry standard. It sounds dumb – but we let inertia hold us back. We finally said, damn the torpedoes. Let’s just try it and see who pushes back.

The result: Only 5 out of 20 new customers said something.

The lesson: Change it and see who complains. It’s never as loud as you think. 

2. Encouraging ACH Payments

Next, we tried to convert customers who sent us physical checks each month to put down the pen and start paying us online via ACH.

This was a pain, I’ll admit it. It involved conversing directly with the payables teams of about 50 customers via email and phone. Just finding the right person was often difficult, especially when you are dealing with multinationals who have massive billing departments. I’d say half we sorted without picking up the phone, and the other half we had to have (SCARY) a real-life conversation. 

What I discovered was the person on the other side either kicked it up to their boss, causing a bit more back and forth, or really didn’t care to make a fuss and agreed. We did have to send over a few W-9 forms again (they seemingly always get lost. If you know, you know.) and sign a few papers. But hey, it was well worth it.

After that, we took inventory (no pun intended) of who was left paying us with paper checks (dinosaurs!). In the background, we set up a lockbox run by our bank in a central location in the US. This is a small thing, but we are located in MA and most of our customers were sending checks from their HQ in the Midwest or South. We were able to pick a lockbox closer to them to cut down on mailing “float” by a day.

We notified them that we had set up a lockbox with our bank, and provided them a new address to send the checks to going forward. This also meant we no longer had to go to reception at our shared office space each week, fish through the myriad of envelopes and junk mail, open the letters, and deposit any checks via mobile. This part of the process was a self-inflicted wound we were determined to rectify. 

The days of losing checks were over! I hate to admit it but it does happen. At the time we were receiving more than 50 checks a month, which was a headache to keep track of and scan. It gave back at least half a day per week to a member of our accounting team. 

As luck (or math) would have it, the interest we made on the account from deposits easily made up for the fees associated with the lockbox. Checks were getting deposited on average four days earlier, and cleared our bank account about a day faster than mobile, since it was the bank doing it on our behalf. 

So that’s how we systematically changed our collections.

The result: We dropped 18 days like a bad habit. 

The lesson: Never underestimate the power of small operation changes.

But we didn’t stop there. 

3. Renegotiating Payables for Better Terms

The next element of the cash conversion cycle we attacked was payables. The majority was tied up in software we paid other tech companies for, which we used to either build our product, market our product, or communicate with other employees internally. The good thing about software is that if you are on annual contracts, each year you have a built in chance to “play ball” and renegotiate terms. So upon renewal, I started asking for quarterly payments on every software contract I signed. Most of the reps I spoke to had a much easier time pulling this lever internally than price. We went from having 80% of our contracts billed annually and upfront, to more than half being quarterly… a few even in arrears!

The biggest contract I renegotiated was Salesforce, moving a massive up front annual payment to quarterly payments. This alone was a game changer. A big whack of cash no longer vanished from our account each year. It went in drips.

And remember, interest rates were also rising at the time. So the cash I kept on hand longer collected interest longer which helped pay off the lockbox fees and more. The interest that year helped pay for 4 more developer salaries. But that’s for another day… 

The result: We improved our DPO by 17 days by asking for quarterly payments at renewal.

The lesson: Payment terms are an easier lever to pull than pricing asks in a negotiation.

A Note on Inventory Management

There’s a conspicuous part missing from my CCC story: inventory. You can’t touch the products that my company builds – they’re bits, not bites (or whatever the saying is). But don’t forget that for the majority of companies in the world, managing inventory is a massive headache.

Much like the saying “planes don’t make money on the ground,” you could say that “clothes in a warehouse” or “car parts on a shelf” don’t make money either. I’ve taken some snapshots below of auto and apparel industry cash conversion cycles to give you a peak into who’s winning their CCC battle. The amount of cash tied up in inventory can seriously constrain growth.

I’ve anecdotally heard that some of the major auto suppliers don’t pay their suppliers until stuff has actually been purchased off the shelf. That’s the ultimate test of power in the relationship. 

The result: Growth can actually kill a company with inventory management problems.

The lesson: Inventory management terms are a true test of power in a vendor relationship.

Trust the Process

Overhauling my company’s cash conversion cycle was a journey – not a one time “event.” It was more tactics than strategy. And it wasn’t without its frustrations. For example, some suppliers continued sending paper checks to our old address for five more months. But if you trust the process and remain consistent in your communications and negotiations, it proves out in the numbers. 

My favorite email I sent all year was one to my CEO, congratulating my controller on this overhaul and explaining how it freed up resources for growth. And he agreed – our accounting team was nothing short of heroes.

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In this episode of Maxio’s SaaS Expert Voices podcast, I interviewed Thomas Lah, a leading expert on SaaS business models. Aside from being a serial author and a professor at Ohio State University, Lah brings over two decades of experience advising technology firms on strategy, business operations, and professional services as the co-founder of the Technology Services Industry Association (TSIA).

During our discussion, Lah gave me his invaluable perspectives on the rapid evolution of software delivery models, the performance metrics that actually matter, and actionable ways executives can transform their organizations to achieve sustainable growth. Whether you’re a founder aiming to scale responsibly or an established leader managing through economic uncertainty, these insights from Thomas Lah will show you how to uncover hidden profitability levers in your business and scale your SaaS responsibly.

How the SaaS industry has changed since cloud-based delivery

The software industry wasn’t always the “move fast and break things,” product-led, AI-powered hodge-podge that’s synonymous with the tech industry today.

The SaaS landscape has undergone big changes since the emergence of cloud-based software delivery over a decade ago. As Lah recounts, “If you look at software companies right now, there’s really three profiles” consisting of born-in-the-cloud providers, legacy on-prem vendors, and a majority occupying a middle “hybrid mode.” He elaborates that these companies have “moved their pricing models to recurring, so they have a lot of subscription revenue” but maintains that “there’s still a lot of on-prem out there.”

According to Lah, this transitional positioning creates financial instability for many SaaS ventures. 

By failing to realize the economies of scale and operational efficiencies that are intrinsic to genuine cloud platforms, products risk becoming competitively disadvantaged. “I think there’s no doubt that [cloud-based delivery] is the winning distribution model,” says Lah.

The verdict is clear—true cloud-native architectures represent the undisputed winning approach to long-term success. The question facing organizations today is not whether to make the leap, but how to migrate their legacy systems without disrupting the business.

TSIA Cloud 40 Index: How are top cloud companies performing?

To quantify the financial performance of leading SaaS businesses, Lah spotlights analytical research from TSIA’s benchmarking of “The TSIA Cloud 40”, an index of 40 of the largest born-in-the-cloud companies. 

He notes, “If you move forward to what we’re seeing now [in Q3 2023], the TSIA Cloud 40 companies are growing by 14% on average, but that’s down from a couple of years ago when they used to grow north of 20%.” 

Despite the decrease in growth for cloud-based companies, Lah also noted that we’re seeing improving gross margins as operators squeeze more from existing infrastructure. As Lah reports, these companies are now seeing “about 70% gross margin.” However, he also highlights how their “sales and marketing expenses are getting chipped down.” 

This chipping away of vital GTM functions like sales and marketing over the past year has left profits lacking, with Lah stating that the average GAAP “operating income [remains] lingering in negative territory at -7%.” On the other hand, best-of-breed competitors like Salesforce have turned the corner to consistent profitability. 

In Lah’s estimation, for SaaS companies operating in a competitive vertical or horizontal market, “it’s going to take a lot more work for these companies to get into a profitable posture.”

The “Rule of 40” vs. TSIA’s “Rule of 35”

Given this recent uninspiring profitability, Lah questions the traditional benchmarking metrics that investors use to evaluate SaaS companies. If you’ve read my article on the subject, you know I believe SaaS founders should obsess over the Rule of 40, so I was curious to hear Thomas’s perspective.

He first addresses the ubiquitous “Rule of 40,” which states that as long as revenue growth percentage plus profit margin percentage exceeds 40%, a company demonstrates adequate financial health. As Lah points out, this benchmark “rewards high growth even with losses” and has become a “myth” that is rarely achieved in practice. 

To better assess operational efficiency, his firm, TSIA, devised what they believe to be the superior “Rule of 35.” 

As Lah explains, it harshly scores companies by saying they should convert at least 35 cents of each dollar into profit after accounting only for basic product delivery and sales/marketing costs. Savvy analysts now use this formula and have discovered that “the rule of 35 companies’ valuations are holding up much better” through turbulence. 

Essentially, the ability to functionally operate at scale now trumps impractical growth targets, but investor perspectives still need to catch up to this reality.

Revenue Acquisition Cost (RAC): A new way to track sales efficiency

Alongside broader profitability, Lah meticulously tracks sales efficiency as a key indicator of enterprise health. He highlights Revenue Acquisition Cost (RAC) as a crucial metric that compares investment in sales and marketing to revenue growth yielded. 

Calculating ratios here benchmarks how much spending is required to acquire each incremental dollar of income. Lah reveals that “the average RAC number for cloud companies is actually 2.84,” meaning $2.84 must be spent across the Cloud 40 to gain $1 in sales. However, leading players demonstrate far greater frugality. For example, cybersecurity company Zscaler achieved a RAC number of 0.46, attaining enviable customer monetization traction. 

For laggard organizations with bloated RAC multiples, Lah warns, “If your RAC number is higher than your competitors, you have a problem. You have a serious problem.” Pencil-pushing sales leaders who are obsessed with negligible percentage gains often miss the bigger picture here, according to Lah. Modern cloud and SaaS companies should instead focus on maximizing their overall market capture through enhanced sales efficiency.

The changing role of the SaaS CFO

Let’s pivot away from abstract scoring systems for a second. While modern SaaS sales leaders have their work cut out for them, Lah also spotlights the urgent need for upgraded financial stewardship as a driver toward consistent profitability. 

He observes that “there are a lot of SaaS executive teams that have never ever managed a profitable software business model” accustomed to an “it’s okay to lose money” ethos.

Today, the role of the modern SaaS CFO must expand beyond the historical duties of governance and reporting. Instead, they should act as a “genuine strategic partner and advisor to the rest of the business.” As Lah encourages, these finance leaders must build new competencies to help model, plan, and engineer sturdy yet dynamic profitable business models tailored to recurring revenue streams.

For SaaS finance leaders that only have experience scaling tech unicorns, TSIA research offers the “porpoise principle” as a viable framework for achieving efficient growth. 

The “porpoise principle” states that: SaaS companies should demonstrate the ability to breach into profitability for a period to prove credible control of the enterprise, then optionally plunge resources into aggressive growth initiatives once more on a deliberate basis. If you’ve read Todd Gardner’s article on the Dolphin Strategy for SaaS growth, you know we believe in this same mantra—SaaS companies can operate unprofitably for long periods and still create substantial value

Lah concludes “there’s a new muscle that’s getting built there. [Finance leaders] really do need to be a strategic partner with the rest of the executive team to help get a vision around what a profitable business model is going to look like.”

Thomas’s proven tactics for getting SaaS companies profitable

While finance leaders are under pressure to adapt to new market circumstances, the good news is that becoming profitable doesn’t require reinventing the wheel. TSIA’s research has identified several strategies used by leading SaaS companies to build profitable recurring revenue models. Here are a few of the tactics Thomas gave me from our conversation:

1. Monetize your company’s service efforts

First, Thomas recommends “monetizing service efforts” instead of providing services that drain your company’s resources. Many SaaS companies offer customer support or professional services for free or at break-even pricing as part of their baseline packages. However, these resource-intensive services eat into profit margins.

Instead, you can consider capturing the value of these premium services by making them paid add-ons or limiting them to higher pricing tiers.

2. Diversify your sales channels

Next, he suggests “diversifying sales channels” to target different customer segments. For example, specialized customer success managers could handle simpler mid-market sales while complex enterprise deals can be reserved for seasoned account executives who are familiar with high-touch sales efforts. 

Then, for prospects who may need more self-education before committing, you can offer free trials, freemium tiers, or low-touch webinar sales to enable bottom-up adoption. Making it easy to experience the value of your SaaS upfront can convert many smaller customers.

3. Leverage customer data to drive growth

Finally, Thomas advised me that companies should enable “customer-led growth” by leveraging their users’ usage data and analytics. 

For example, your analysis may reveal certain use cases or workflows that strongly correlate with higher annual contract value. Customers using certain premium features or integrating with certain complementary tools may have higher retention rates. These signals will help you pinpoint segments that are primed for upsells into premium tiers or product bundles.

By using a SaaS metrics platform to keep up with your customer usage data, you’ll be able to both identify and take advantage of these signals to improve your profitability.

There’s one last growth lever Thomas and I had to address that’s fairly straightforward: raising your prices.

Lah notes that we’ve definitely seen knee-jerk across-the-board price hikes throughout the technology space as a response to inflation. But Lah questions the sustainability of this tactic.

He warned that “customers are not going to just accept double-digit price increases.” He then highlighted bold moves like Salesforce imposing a sizable 9% fee escalation but cautions that most SaaS vendors lack the market dominance to unilaterally squeeze greater profits from their end-users. 

Lah and I concluded, if you’re considering a 10-12% price increase but don’t have any competitive advantage or a pre-existing hold over your industry’s market share, you’re going to eventually lose customers. Plain and simple.

Instead, he advises a more strategic approach before hitting customers with higher costs. First, analyze which customers see your product as an essential “must-have” versus a “nice-to-have” they could live without. Segmenting your customer cohorts will inform the rest of your pricing strategy, whether that means offering discount bundles, implementing a usage-based pricing model, or pursuing customer expansion to hit your revenue goals.

Adopting the new SaaS playbook

As the SaaS landscape matures, leaders must update their go-to-market playbooks. This means embracing new performance metrics, pricing models, and executive responsibilities that are tailored to today’s cloud-native businesses. 

Want to hear more from my conversation with Thomas Lah? Check out the full SaaS Expert Voices podcast episode to learn more.

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Get usage-based pricing benchmarks and best practices

In partnership with The SaaS CEO and RevOps Squared, we surveyed 490 SaaS professionals to better understand how usage-based pricing fits into a B2B SaaS monetization model. In this report, we share the data we gleaned along with commentary from SaaS across the industry.

Early in my VC career, I was sitting in a board meeting when Frank Adams, the founder of VC firm Grotech, told the CEO he needed to grow or become profitable; those were the only two choices. I was fresh out of business school and had somehow missed this lesson. I felt like asking for a refund.

Fast forward to today. Whipsawed by free money, then no money, all SaaS businesses have tightened their belts in the last 18 months. Some companies cut expenses, maintained growth, and became profitable, while others cut expenses, saw growth deteriorate, and remained unprofitable. Many of those companies are in a holding pattern to see what’s next in the funding environment and broader economy.

In the public markets, the low growth/low profit companies are in the Dead Zone and Grey Zone on the chart. They must find a path up, to the right, or both. Hanging out in the slow growth but unprofitable zone is risky and destroys value, especially when rates are high.

Blog_Growth vs Profit Graph

How to choose between growth and profit

Choosing between profit and growth is not overly complex, but it’s not easy either. All SaaS companies can be profitable. The question you need to answer before picking a lane is:

Is there an objectively reasonable, data-driven, and fully-funded plan to re-accelerate growth? 

If not, the business needs to start making money. Now. 

Scaling During a Recession: Winning Strategies for SaaS Leaders

In this playbook, you’ll learn how pricing consultants, fractional CFOs, and SaaS veterans recommend you adapt to keep winning—even in a volatile market.

SaaS businesses have a great business model: recurring revenue, high gross margins, and discretionary expenses. Making them profitable may be painful, but it’s doable. 

Getting to breakeven is the first step. Breakeven allows more time to identify incremental growth plans. But there are risks to staying in the slow-growth and breakeven position for too long. In addition to opportunity costs, technology risks, economic risks, and competitive threats can quickly turn slow growth into decline. 

Upon committing to profits, target at least 20% of revenue, which is the median for the Max Profit group of public companies. This level of profitability generates an acceptable valuation on an EBITDA basis and allows for a sale, re-cap, or M&A strategy, as it can support leverage and is attractive to PE firms.

Circling back to the growth question: “Objectively reasonable” is a filter designed to emphasize clear thinking. This is not a test of will or grit; it’s an “objective” exercise, and “reasonable” is the bar to be cleared. 

“Data-driven” means the growth plan needs to be based on things like successful go-to-market experiments, early adoption of a new product, or a successful cross-sell program. These plans should not be based on a “good pipeline” or an “amazing” new VP of Sales.

And finally, “fully funded.” If the growth plan requires capital, and there is none, it’s not helpful, and a capital raise becomes the critical next step.

It’s possible to survive with slow growth and weak profits, but not long. It’s time to pick a lane.

About the Author

Todd Gardner is the Managing Director of SaaS Advisors and the founder and former CEO of SaaS Capital. Todd was also a partner in the venture capital firm Blue Chip Venture Company and was a management consultant with Deloitte. Todd has worked with hundreds of SaaS companies across various engagements, including pricing, capital formation, M&A, metrics, valuations, and content marketing. Todd is a graduate of DePauw University and Indiana University.

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How to Scale During a Recession: Winning Strategies from SaaS Leaders

In this playbook, our panel of pricing consultants, fractional CFOs, and SaaS veterans provide actionable strategies and tactics to keep all your teams aligned around a single goal: beating the market downturn.

Get the ebook

I recently presented on this topic at SaaS Metrics Palooza. If you’re prefer to watch the recording, you can view it here. Otherwise, read on!

We are not the first to say that “the days of growth at all cost are over.” However, we have the data to prove it for private companies.

According to our recent Maxio Growth Index report, which aggregates $15B of billing and invoicing data flowing over our platform for 2300 B2B SaaS companies, the market has shifted dramatically over the past 18 months (see below). In Q1 2022, B2B SaaS companies were still experiencing solid growth (30% YoY), and everyone was living high on the hog. I miss those days!

But we have seen a continued reduction in the overall growth rates since then. By Q1 2023, the growth rate for our customers (primarily Seed-Series C) had fallen to ~13%.  And while that is bad, companies that are less than $1MM have really taken a hit over the last six quarters.

Maxio Institute_H1 2023_Average Growth Rates of B2B Subscription Companies

If you step back and think about it, this makes intuitive sense. Many of these early stage companies haven’t gotten product market fit yet, are running out of money, and their investors have closed the purse strings. How many of you have had investors say: “remember when I said you needed enough cash for 18 months? I was kidding: you need to make it last 36 months.” That is a BIG problem for people who raised money in 2020 and 2021. 

Chelsea Stoner, our general partner at Battery Ventures, says this drop is worse than what she’s seen in her many years as an investor. She also pointed out that Battery is still finding companies who are achieving 100% YoY growth, so there are still winners out there.

Winning has just gotten a lot harder.

The Growth State for B2B SaaS Businesses

We’ve analyzed the billing data of over 2,100 B2B SaaS companies between 2022 and 2023—download the report to learn what we found.

The impact of growth efficiency on valuations

Growth efficiency is now being rewarded in the marketplace.

What does this mean?

Every CEO/CFO I’m talking to is starting to look closely at modulating their investment in GTM versus other areas of the business and are doubling down on the Rule of 40 (a combination of your growth rate and profit margins) as a measure of overall business performance. 


Looking at the graph below, you see that in Q4 of 2021, you could have a 10x valuation with less than a 10% “Rule of 40 value.” But a year later, you had to have a “Rule of 40 value” greater than 60% percent to get a 10x valuation.

This means that investors are scrutinizing not just your growth rate, but also your profit margin. That’s why we talk about growth efficiency.

Growth Efficiency is being rewarded

How to measure growth efficiency

At the highest level, growth efficiency can be measured by such things as CAC and magic number. However, to really understand the levers you can pull, you have to get to another level of detail in terms of understanding the costs to acquire/serve customers and run your business. 

This can be a Herculean task unless you have a way to frame capture and represent these metrics in a consistent way. This is why, before we dig into the metrics that matter for growth efficiency, let’s lay the foundation for how you’ll track them: the Operating Metrics Scorecard.

The Operating Metrics Scorecard, popularized by Ben Murray of SaaS CFO, is a set of metrics grouped under five different categories from growth to retention to gross margin, profit, OPEX, and efficiency.

We use this exact scorecard to measure our performance at Maxio, and I recommend it to everyone who wants to get a better sense of what’s working in their business and what’s not.

Ben Murray's 5 Pillar SaaS Metrics Framework

If you’re a really small company, Ben would tell you to just focus on the growth column. But as you’re starting to get some revenue in the door, you’ll want to shift your focus to the retention column metrics. As you reach the series B/C stage, you need to focus in on the gross margin.

Take a look at two example scorecards in the image below. Both are examples from companies that Ben worked with. The one on the left is doing well, as you can see from all the green on the board. This means they can hone in on the few areas that need more attention. In this case, it’s new bookings and gross logo retention. Hard problems to solve, but the overall business is still working.

Ben Murray's 5 Pillar Metrics Framework Examples

By contrast, the company on the right has very little going well when compared to their budget and the industry benchmarks. You would never hope to be in this position; however, if you are, you need to identify the systemic issues. Is it a product market fit issue? Did you overinvest in headcount, anticipating growth? To me, this looks like a restructuring scenario or, at the very least, a pivot scenario. This leads to a very different type of conversation with your board. You are going to need money, unless they provide you a convert or bridge loan. And you’re going to take a hit on valuation if you try to get another investor—maybe even a recap. Those are HARD conversations.

Your Operating Metric Scorecard is an incredible diagnostic tool, enabling you to 

  1. Assess what is really going on in your business
  2. Focus on what needs it most
  3. Frame up conversations with your board about required investments and capital structure

The only two metrics that matter

When I stepped in as CEO at Maxio, I asked Chelsea about the metrics that mattered most to investors as we would not be able to focus on all 27 metrics that are included in the Operating Metrics Scorecard above. 

She said there are really two engines that power winning tech companies:

  1. The cash engine
  2. The growth engine

The cash engine

Your cash engine is measured by your recurring margin, which tells you how much free cash you generate from $1 of ARR. 

It’s basically this: You’ve got to pay your cost of sales (aka COGS), which is reflected in your gross margin percentage, and you need R&D to build the product. Then you have G&A to maintain the system. Once you pay these costs, you will then have cash to invest.  

Calculate this metric by subtracting R&D and G&A from your gross margin.

You now can decide where to invest that cash. Should it go into your growth engine, your bank, or to fund M&A?

Cash Engine Metric Equation

The growth engine

Your growth engine is a growth efficiency metric which tells you: how much net new ARR do you gain per $1 of sales and marketing? This is the metric most of the people I am talking to are trying to tune when faced with the broader macroeconomic headwinds we are facing.

Growth Engine Equation

Calculating this metric is a bit more complicated than it sounds. It’s your GAAP revenue in one period minus the GAAP revenue of the previous period. In this case, we’re using a quarter. So, for this calculation, multiply by four and divide that by your sales and marketing costs in the period prior to when you would be driving the revenue.

It helps to split out your growth engine in terms of the net new ARR that’s coming from new customers and that which is coming from existing customers. This allows you to separate out the investments you’re making to acquire new customers versus grow current customers. 

Using these metrics to frame conversations with your board will help you understand how the business model is working. 

Ultimately, the conversation about your cash engine and growth engine resolves to a conversation about how much cash you need to generate given the market and your growth ambition: Are you generating enough cash from operations to fund growth? And what do you want to do with this cash in the short term and long term?

About the author

Randy Wootton is a GTM executive who has been helping marketing and sales tech companies develop and scale their SaaS capabilities for over 20 years, serving at companies like Percolate, Rocket Fuel, Maxio, and Salesforce. He’s a 3x SaaS CEO (public, private, VC- and PE-backed) and board member of multiple private companies.

Randy currently serves as CEO of Maxio, the leading provider of billing and financial operations solutions for high growth B2B SaaS companies.

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The State of SaaS Growth 2023

We’ve analyzed the billing data of over 2,100 B2B SaaS companies between 2022 and 2023 and have presented key insights, including:

  • Growth rates of businesses based on billing type
  • Where some of the fastest growing companies are located
  • The bar for raising your successive round of investment.

Download the report

Cash burn and capital spending are inevitable when trying to scale a SaaS venture, especially in the early startup stages. Luckily, the recurring revenue brought in from subscription models allows SaaS businesses to generate consistent revenue month over month, keep up with capital spending, and scale their way to a successful merger, acquisition, or IPO. In short, recurring revenue fuels growth in a subscription-based revenue model like those frequently used in SaaS. 

Recurring revenue is commonly measured as either monthly recurring revenue (MRR) or annual recurring revenue (ARR). In relation to a SaaS business, this is usually made up of income from monthly or yearly subscriptions to cloud-based software. 

MRR vs ARR at a glance

MRR and ARR are both valuable figures for measuring recurring revenue. Where MRR measures recurring revenue on a monthly basis, ARR measures on an annual basis.

There are several ways to drill your MRR data down by focusing specifically on the following areas:

  • New or reactivated subscriptions
  • Customer renewals
  • Upgrade subscriptions or add-ons
  • Downgraded subscriptions
  • Canceled subscriptions

Because ARR looks at a 12-month period instead of just one month, it provides a more comprehensive overview of your revenue figures. Meanwhile, MRR provides more granular insights at the month-to-month level.

For this reason, MRR is far more commonly used for most B2B SaaS subscription businesses—even those organizations that offer annual subscriptions. As new subscribers sign on, subscriptions shift up or down, and churning customers leave, month-to-month data provides faster insights that businesses can use to take action on.

Tracking ARR can make sense for SaaS companies that have longer contract terms, and it can also be valuable for end-of-year calculations.

Why is recurring revenue important for SaaS businesses?

In the early days of tech, software was bought and sold like any other product via a single purchase. This was mostly due to the fact that software wasn’t yet available on the cloud. Now, software has become easily accessible to anyone with an internet connection and the buying process has changed as a result.

Using a subscription business model gives SaaS companies the flexibility to meet changing customer expectations and make rapid changes to their pricing and packaging. Tracking this recurring revenue as it comes in provides businesses with detailed insights into their financial health. It allows them to predict short-term and long-term growth, forecast revenue, monitor cash flow and growth rate, and optimize internal processes to increase MRR expansion rate.

Key metrics to track in a SaaS business model

SaaS enterprises typically use a recurring revenue business model, which means most of their revenue comes from customer subscriptions.

This translates to a constant fluctuation in customers and revenue, so it’s essential to keep track of these changes. The success of a SaaS revenue model can be measured in part by two critical SaaS metrics which both affect recurring revenue:

1. Customer acquisition rate

Customer acquisition is measured by the number of new customers that sign up for your SaaS product in a given period of time. At the same time, customer acquisition cost (CAC) is a vital metric for early-stage SaaS companies and can be improved by developing an effective customer acquisition strategy.

2. Customer retention rate

Customer retention is measured by the number of customers that renew their subscriptions in a given period of time. Customer retention and renewal rates reveal whether or not a SaaS company has a sustainable business model. If customer churn rates start to rise, your revenue could start to plateau or decline at an alarming rate.

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What is monthly recurring revenue (MRR) in SaaS?

Monthly recurring revenue is often cited as one of the most critical metrics for a SaaS business, particularly when used by C-level execs as a measure of company performance. Within the subscription industry, it’s essential to track MRR because it accounts for the vast majority of total revenue and is a strong indicator of future growth.

Committed monthly recurring revenue (CMRR) is the total value of the recurring portion of subscription revenue. In a term-based SaaS business, this means the portion of subscription revenue that is recognized each month; it should not be confused with contracted MRR, which is the value of the contracted recurring portion of subscription revenue. In many businesses, the values of these two metrics will often overlap, but the figures could differ significantly depending on your billing and pricing models.

There are several different ways to measure MRR, and each can be used to discover new business insights and improve your recurring revenue model.

What are the different types of SaaS MRR?

SaaS companies that use MRR to measure revenue predictability will typically focus on one or more KPIs that apply to their business. These can include the following:

MRR from new or reactivated subscriptions

This is the amount of revenue generated from newly acquired or returning customers. While both of these metrics are calculated similarly, revenue generated from returning customers should be calculated separately as reactivation MRR. 

MRR from customer renewals

This is revenue that already exists from customers with ongoing subscriptions and can change month to month as users cancel, upgrade, or downgrade their subscriptions. These are important metrics to show the value of the product from the customer’s perception.

MRR from upgraded subscriptions and add-ons

MRR from subscription upgrades includes any additional revenue made from add-ons, upselling, and cross-selling. This is often calculated under the umbrella term of expansion MRR and is a good indicator of customer satisfaction and loyalty. Renewing or upgraded subscription contracts clearly indicate the value a product is bringing to the customer.


It’s equally important to take into account MRR losses, also known as contraction MRR. They include: 

MRR losses from canceled subscriptions 

Revenue loss incurred from canceled subscriptions is also commonly referred to as churn. Calculating churn gives SaaS businesses insights into what factors contribute the most to lost revenue.

MRR losses from downgraded subscriptions

Downgraded subscriptions account for lost revenue each month and should be added together for a monthly total. When calculated together with churn MRR, you get your total contraction MRR, indicating your total monthly subscription revenue loss.

How to calculate monthly recurring revenue (MRR)

In their simplest form, MRR calculations can be done like so:

MRR = (new MRR expansion MRR) – (churn contraction MRR)

Here’s a closer look at each of these separate revenue variables:

New MRR and expansion MRR

  • New MRR can be calculated simply as the number of new subscribers multiplied by the subscription fee. For example, 12 new subscribers at $50 per subscription = $600 in new MRR. 
  • Renewed subscriptions can be calculated as ongoing subscribers multiplied by the subscription fee. For example, 100 ongoing subscribers at $50 per subscription = $5,000 in renewed MRR.
  • MRR from upgraded subscriptions and add-ons (expansion MRR) can be calculated and added together individually. For example, four $20 subscription upgrades and two $30 subscription add-ons = $140

Churn and contraction MRR

  • Churn MRR is calculated by multiplying the number of canceled subscriptions by the subscription fee. For example, if 20 customers canceled their $50 subscriptions, that’s $1,000 in churn MRR.
  • Contraction MRR is calculated by adding the total cost of all subscription downgrades together. For example, 3 downgrades of $20 1 downgrade of $50 = $110.

What is annual recurring revenue (ARR) for SaaS?

Annual recurring revenue (ARR) is the same as MRR, only calculated on a yearly basis. It’s used more commonly by SaaS or subscription businesses with longer-term subscriptions, such as annual contracts, but it can also be useful in end-of-year calculations. ARR is equal to the value of your term subscription’s contracted recurring revenue components, normalized to a one-year period.

How to calculate annual recurring revenue (ARR)

To calculate your SaaS ARR, you can do the same calculations as MRR using figures over a 12-month period. However, several ARR components must be taken into account when making your ARR calculations to ensure accuracy and validate your financial metrics.

Why use MRR vs ARR?

Objectively speaking, there really are no compelling reasons to standardize on ARR versus MRR. Class dismissed. For those wanting extra credit, read on.

ARR is used almost exclusively in B2B subscription businesses and only when the minimum subscription term is a year. But, MRR is by far and away the most popular normalized revenue method for B2B subscription businesses, even for those with annual subscription terms (by the way, ARR is rarely used in B2C subscription businesses).

MRR vs ARR: Frequently asked questions

Who uses ARR?

ARR is frequently adopted by B2B SaaS businesses with multi-year terms and tends to be used in businesses with lower transaction volume and high transaction value. It is also not uncommon for companies that use ARR to also use MRR.

Are there any benefits to using ARR over MRR?

ARR does have one benefit over MRR: ARR aligns well with your GAAP revenue. MRR and monthly revenue can differ significantly in any given month due to different revenue allocations over 28, 29, 30 and 31 day months. Over a one-year term, ARR is generally going to line up much more closely with GAAP revenue over that period.

Is that a compelling reason to use ARR to measure monthly subscription plans and their success? Not really.

What is the downside of ARR vs MRR?

As far as drawbacks in standardizing on ARR over MRR for recurring revenue performance metrics, short agreement terms or billing periods can pose a challenge if you adopt a practice of associating or equating ARR to GAAP revenue. With a short subscription term, which could be due to a one-off agreement or a coterminous add-on service, the ARR is factored up relative to the contracted amount and then can grossly overstate “revenue” relative to reportable GAAP revenue.

Is that a compelling reason to avoid ARR? Not really.

Will VCs and investors be confused if you choose ARR over MRR? 

Any venture capitalist who’s considering investing in your business will have a lot of questions, starting with your valuation and how your growth and finances stack up against industry benchmarks. Digging into your financials will give them those answers—but they’ll probably make some assumptions in the process.

For instance, if you walk into a VC meeting with a single slide full of ARR metrics, everyone in the room will know you are an annual subscription company. They’re likely to infer from ARR that you lean toward the ‘enterprise’ side of the marketplace.

If the same slide page has MRR metrics, they would need further information to determine if you were a B2C or B2B subscription business and to understand your relative price points and typical agreement duration.

ARR vs. MRR conclusion

Not convinced by the compelling explanations above? Good. Then you’ve figured it out: It doesn’t much matter which metrics you choose, as long as you pick one and stick with it. And if you don’t care, play it safe, go with the masses, and use MRR.

Read more about recurring revenue and other SaaS metrics on SaaSpedia.

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Are you using QuickBooks as a general ledger (GL)? Then the following scenario will sound familiar: It’s time to close out the month, but you’ve been putting it off due to the sky-high stack of manual journal entries you have to complete. 

Why connect QuickBooks to Maxio? 

By connecting QuickBooks Online to Maxio, you can: 

  • Automate accounting workflows 
  • Reduce reconciliation times
  • Save the finance department countless hours every month

How it works 

Maxio is a financial operations platform for B2B SaaS companies that offers services for billing, subscription management, revenue recognition, and SaaS metrics & analytics. 

Once a sales order is processed (either manually or automatically through a CRM), that sales order data flows into Maxio where the appropriate customer, contract, transaction, invoicing, and payment records are created. 

From there, Maxio automates billing schedules and collections efforts, as well as revenue recognition schedules and SaaS metrics. 

Maxio maps to your Chart of Accounts in QuickBooks, so you know Revenues are being booked to the appropriate place automatically. 

At the end of the month, Maxio generates a consolidated journal entry that is then recorded in QuickBooks’ General Ledger.

Graphic image_Maxio Worfklow

Product Details 

In Maxio, there are convenient linkbacks for various record types, making it easy to navigate between systems and provide audit samples quickly. 

Sales tax

Sales tax can either be calculated in Maxio via our free AvaTax integration or with QuickBooks’ tax services. 


Both QuickBooks and Maxio are able to support multi-currency. By enabling QuickBooks’ multi-currency setting, all synced customers and sales receipts will use the same currency as the originating Maxio instance.

Product Screen Shot_Quickbooks Integration

Availability and pricing 

Maxio’s QuickBooks integration is available to all Maxio customers and is included in our base plan

If you have any specific questions, don’t hesitate to reach out to

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As continued headwinds make the future of many SaaS companies uncertain, there’s one KPI that’s ultimately determining who gets ahead: revenue efficiency. Efficient revenue growth has been a major point of discussion for SaaS owners and operators, but it’s still difficult for many of them to shake off the old growth playbook of aggressive customer acquisition.

To facilitate discussion around revenue efficiency, we met with some of the brightest minds in SaaS during our Expert Voices event in London. Jon Steinberg, Co-founder of Mountside Ventures, and Octopus Ventures Partner Edward Keelan led the discussion on:

  • Retention and expansion best practices
  • The importance of cross-functional alignment between Sales and Leadership
  • How to identify expansion opportunities to achieve profitable growth in SaaS

Here’s how SaaS leaders are thinking about revenue efficiency in their organizations.

Embracing a new perspective: acquisition vs retention

According to Jon, citing a research report from Price Intelligently, incremental improvements across retention and expansion can make big improvements to your bottom line.

  • 1% improvement customer acquisition = 3.3%
  • 1% improvement in retention = 6.7%
  • 1% improvement in expansion = 12.7%

Furthermore, churning a key client close to or during an investment round can extend deal timelines by multiple months, or even kill deals entirely.

Despite the overwhelming evidence on this topic, Jon also states that almost all B2B companies he comes across are massively under-resourced on customer success and he urges SaaS leaders to prioritize this function the same way they would new sales. 

In short, if your customers feel looked after, they’ll look after you.

Here are a few actions you take can if you aren’t ready to invest in new CS headcount:

  1. Invest in technology: Decreased user activity and less logins are possible warning signs that a customer is about churn. By investing in CS technology, you can measure these different variables with an overall ‘customer health score’ that will help you determine the state of your different customer accounts.
  2. Automate, automate, automate: Sam Altman, CEO of ChatGPT, noted in a recent podcast that customer success is one of the roles he sees as being the highest automatable through conversational AI. For example, an AI trained on a company’s help documentation could serve up the appropriate response to incoming help tickets or customer queries. While this may not be a full-stop solution, it can lighten the workload of a lean customer success team.

Tackling the revenue expansion challenge 

While customer retention comes with its own set of challenges, so does revenue expansion. One of those challenges being: how are you supposed to convince customers to spend more money with you in a period where companies are determined to cut back on spending?

Here are a different methods you can use to achieve revenue expansion (without having to shake down your current customers for more cash).

Achieving revenue expansion through pricing

A thoughtfully designed pricing strategy is one of the most effective-yet-overlooked growth levers in most SaaS businesses. If your ultimate goal is revenue expansion, you need to re-examine the way you’re pricing your products and services.

Specifically, experimenting with different pricing options, like usage-based pricing, discounts, and add-ons are all effective means of generating revenue without bringing in new sales.

The Changing Role of the CFO

Edward described how the role of the CFO had changed beyond recognition from where it was 12 months ago. “This time last year, the CFO’s focus was still on the next funding round. That has completely changed, and perhaps looks like something more traditional. It’s imperative that the CFO gets closer to both Sales and Customer Service to ensure they understand the importance of growth, but also what is working efficiently in order for them to work together.

However, Maxio CEO, Randy Wooton, challenges this notion and believes that sales needs to have some stake in the game as well. Randy believes that Sales are in a better position to sell add-ons, additional modules, and complimentary products to accounts that they’re already familiar with. Not only does this strategy shift the focus of your GTM teams towards customer expansion, it helps align the organization as a whole around the idea of achieving revenue efficiency.

Building a partnership between Sales and the CEO

Edward continues, given the current state of the market, many SaaS leaders are feeling pressure from their board and investors to start delivering results. According to Edward, a strong partnership and shared vision between the CFO and the CEO are crucial for success.

Here’s how sales leaders and CEOs can get aligned on revenue efficiency:

Regular communication: Establish regular communication channels with your CEO to keep them updated on sales performance, challenges, and opportunities. Sharing insights, market trends, and customer feedback will help your CEO understand the sales team’s activities and align their expectations accordingly.

Collaborative goal setting: Work closely with your CEO to set revenue targets and sales goals that are both challenging and achievable. This collaborative approach ensures that your CEO’s expectations are realistic and that your team has the necessary resources and support to meet those goals. Regularly review and adjust the goals as needed based on changing market conditions and business priorities.

Seek alignment on sales strategies: Engage in strategic discussions with your CEO to gain their perspective on sales strategies, target markets, and customer segments. Collaborate on refining the sales process, identifying growth opportunities, and addressing any barriers or challenges. Seek their input and guidance to ensure alignment between sales initiatives and overall business objectives.

Leading with data: Provide your CEO with data-driven insights about your team’s performance, including revenue metrics, conversion rates, customer acquisition costs, and sales pipeline analytics. By investing in the technology to produce SaaS metrics reports, you can help your CEO understand the effectiveness of your sales efforts and make informed decisions about resource allocation and the company’s strategic direction.

Key performance metrics and investor expectations

Despite your best efforts, your board and investors will be the ones to decide if your company is operating efficiently and performing above industry benchmarks. Here are the metrics Edward states investors are paying close attention based on his conversations in the VC community.


EBITDA is currently having a resurgence in a market where balancing profitability with ARR expansion is key. Investors who used to be all-in on double and tripling revenue growth are now most concerned with getting to breakeven in three to six months.

Net Sales Efficiency

A few years ago, it was okay if a salesperson brought in revenue that was just above the cost of doing business. Today, we’re looking at 3-4x the cost of doing business as an acceptable measurement of success. This metric makes sense for companies that are earlier than their Series B or C, he states that it’s still being scrutinized heavily by investors as a key performance indicator.

Investor expectations aside, what exactly should you be measuring internally to achieve revenue efficiency?

Revenue Efficiency

The goal of revenue efficiency is to ensure your net new ARR is higher than sales and marketing spend. By taking net new ARR for a period of time and dividing by cost of sales and marketing over the same period, you get your revenue efficiency (represented by a percentage). The goal is to keep this percentage under 100%.

If you want to dig deeper, you can split this metric into “bookings” and “expansion” efficiency, which will show you the difference in effectiveness between the two motions. This will give you a better understanding of which motion is more valuable to your business (new sales or customer expansion), which, in turn, informs your decision of where to invest time, energy, and dollars.

What’s most important for your business is to figure out where you’re seeing the greatest ROI. For example, while Net Sales Efficiency is helpful for measuring the cost effectiveness of your sales team, you also need to measure revenue generated via customer expansion against the costs of your customer marketing and customer success activities. By leveraging financial reports to measure efficiency across your organization, you can then determine where it makes sense to allocate capital to grow responsibly.

Want more insights from SaaS finance experts like Edward and Jon?

Check out Maxio’s Expert Voices, an invite-only event series where the best and brightest minds in the SaaS Finance community meet for meaningful conversation about industry trends and best practices. Additionally, Maxio’s latest 2023 Growth Index Report will show you how over 2,000 B2B SaaS companies are leveraging their billing and pricing models to achieve revenue efficiency.

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