If you’ve spent time in a fast-growing SaaS company then you already know that optimizing revenue generation and cash flow are almost always top priorities on any business leader’s KPIs sheet. However, lengthy product configuration discussions, manual pricing approvals, misaligned quotes, and orders, as well as delayed payments can hinder your sales cycle efficiency and make hitting these goals seemingly impossible. 

Both quote-to-cash (QTC) and configure-price-quote (CPQ) platforms aim to address these bottlenecks that frustrate salespeople and negatively impact deals. But which one makes the most sense for your company?

Throughout this article, we’ll explain what QTC and CPQ solutions are, how they differ, their unique benefits and drawbacks, and specific scenarios where one option may prove better than the other.

Differences between quote-to-cash and CPQ

Quote-to-cash and CPQ (configure price quote) can be complementary software solutions that help companies drive revenue, though they serve different business processes. 

Quote-to-cash refers to the entire life cycle of a customer from the moment an inquiry or quote comes in, through negotiation, ordering, fulfillment, and renewals. It manages the end-to-end workflow from revenue generation to revenue management, payment, and renewals. 

CPQ, short for configure price quote software, focuses specifically on product configuration management and quoting, with cross-sell, upsell, and deal pricing optimization in real-time as key features. The main difference is that CPQ tends to be an embedded part of the quote-to-cash lifecycle that focuses on the product configuration and quoting experience—automating and optimizing that specific cross-sell/upsell revenue generation step for efficient order-to-cash operations. 

Both play an important role in standardizing business processes and generating revenue but quote-to-cash takes a broader view across the customer journey.

Quote-to-cash process (QTC) defined

Quote-to-cash (QTC) refers to the end-to-end process that governs a customer’s journey from their initial engagement with your sales reps to revenue realization and renewal. QTC platforms manage the integrated workflows spanning marketing contacts, sales quotes, contracting, ordering, invoicing, collections, and maintaining ongoing customer relationships.

For example, when a prospect engages with a sales rep and requests a customized price quote, the QTC system steps in to guide product/service configuration conversations. It applies rules on pricing approvals, automatically generates proposal documents, and upon deal acceptance orchestrates the downstream order-to-cash operations from fulfillment to revenue recognition on the finance side. QTC unifies all required systems and data points—CRM, ERP, etc.—into a single automated workflow for each customer across their lifecycle.

Benefits of QTC

QTC solutions streamline business processes from deal creation to cash collection. Some of their key benefits include:

  • Streamlines contract management and negotiation workflow: Automates contract drafting, approval routing, and version control for faster cycle times.
  • Efficient order management for inventory and QTC process: Enables real-time inventory visibility and order orchestration from quote acceptance to fulfillment.
  • Faster and more effective invoice process: Automates invoicing with flexible templates linked to contract terms for accuracy and speed.
  • Streamlines entire sales cycle and operations: Provides a seamless workflow for the sales force from deal construction to order execution.
  • Reduces customer churn rate: Increased efficiency, transparency, and compliance improves customer satisfaction and retention.
  • Promotes pricing visibility for customers: Catalog, contract, and asset-based pricing rationalization provides accurate and accessible pricing.

The unified quote-to-cash platform enhances visibility, control, and coordination across the revenue lifecycle—accelerating deals while optimizing business operations.

Drawbacks of QTC

While providing significant process improvements, QTC also poses some implementation challenges, including:

  • Implementing an efficient QTC process: Mapping and optimizing complex workflow touchpoints across sales, legal, finance, and operations.
  • Integrating add-ons and workflows: Ensuring seamless connections with add-on tools for contract lifecycles, billing, reporting, and more.
  • Demanding accurate quotes and invoices: Delivinger rigorous data governance and integrity required with little room for errors.
  • Challenging pricing strategies: Requiring clear, consistent, and justified pricing for products, services, and deals.
  • Scalability of automation: Evaluating infrastructure and capabilities to support the expansion of automated QTC processes.

Companies must strategically assess their organizational readiness along with software capabilities when managing the intricacies of an integrated quote-to-cash platform.

When to use QTC

Deciding between a configure-price-quote (CPQ) solution and a broader quote-to-cash (QTC) platform depends greatly on your business’ specific automation goals and operations complexity. 

Companies that require deep accuracy in pricing for varied customer needs often benefit more from a QTC implementation than standalone CPQ software. The QTC system can incorporate all necessary pricing logic across products, assets, market conditions etc while optimizing the workflows used to construct personalized quotes and offers. 

Similarly, businesses focused heavily on end-to-end process automation from initial quote to revenue recognition and renewals achieve greater efficiency gains from the broader QTC order lifecycle platform. The seamless connectivity into back-end financials and contract databases further improves cycle times. 

Finally, companies with complex account management through integrated CRM systems gain more leverage from QTC as deal progress updates, account activity tracking, and order status communication remain fluid across customer-facing teams and back-office finance and fulfillment staff. The unified data and workflows help coordinate networks of people in addition to automating steps. 

In essence, businesses with customized pricing guidelines, straight-through order processing needs and multifaceted customer relationships tend to benefit most from evaluating dedicated quote-to-cash solutions rather than singular CPQ tools in their technology landscapes.

Configure, price, quote (CPQ) defined

Configure, price, quote (CPQ) solutions streamline and optimize the creation of quotes and orders for customizable products or services by automatically applying pre-defined rules for configuration options, pricing models, and deal generation. Key capabilities include:

  • Configure: CPQ tools build product or service variations, options, and component combinations that meet customer needs and organizational guidelines through guided selection processes and restriction rules. For example, a CPQ system would allow a sales rep to walk through PC configuration questions on memory, accessories, etc., and create valid equipment definitions.
  • Price: Sophisticated pricing engines contained within CPQ platforms evaluate configurations, discount policies, volume levels, and other parameters for dynamic real-time price calculation. Pricing logic stays centralized but flexible for quotes.
  • Quote: The quotes generated by CPQ systems provide customized product/service proposals, accurate pricing, descriptive names/codes, and other details needed to share with prospects and execute orders downstream upon acceptance. The documentation trails back to the specific configuration and pricing logic.

The integrated configure-price-quote functionality provides sales teams and customers a streamlined, accurate way to co-develop the perfect order while optimizing profitability through predefined rules and analytics.

Now that you have a high-level overview of these tools, let’s examine their benefits and drawbacks.

Benefits of CPQ

CPQ platforms build efficiency, accuracy, and speed into the sales process for configurable products and services. Some of CPQ software’s key benefits include:

  • Improves customer relationships: Guided and optimized configuration conversations increase relevance while minimizing back-and-forth.
  • Improved accuracy in deals: Rules-based automation minimizes errors in configurations and pricing.
  • Provides faster sales cycles: Reduces time spent on manual product selection, pricing calculations, and quote creation.

By embedding industry and organizational intelligence into the quoting process, CPQ systems enable sales teams to have more strategic customer interactions – driving higher win rates, larger deal sizes, and accelerated cycles.

Drawbacks of CPQ

While it provides its users with a better quoting process, CPQ adoption has common challenges including:

  • CPQ integrations are time-consuming: Connecting CPQ tools across CRM systems, ERPs, and other backends requires heavy IT effort.
  • Proper training for the sales team: Adoption requires change management as sales teams adjust to new system-driven workflows.
  • Cost of the tool and maintenance: Ongoing costs can present a barrier, especially for smaller companies.
  • CPQ solutions scalability: Finding solutions to scale across geographies, products, deal types, and operationally can be difficult.

Companies should weigh business process disruption and complex integrations requiring technical skills against the efficiency gains from CPQ automation when budgeting implementation time, costs, and resources.

When to use CPQ

When assessing configure, price, and quote (CPQ) solutions versus wider quote-to-cash (QTC) platforms, companies should analyze where the greatest sales process constraints and complexity exist. 

For many organizations, the front-end sales quoting stage for customizable deals proves most cumbersome. Lengthy product configuration discussions, compatibility assessments, pricing table analyses, and quote formulation bog down sales reps. This hinders efficiency and revenue growth. Purpose-built CPQ solutions directly address sales quoting bottlenecks through automated guidance on product selection, rules-based pricing, and streamlined proposal documentation. This not only accelerates deal completion but also enhances accuracy by reducing manual errors in configurations or discounted prices. 

It further enables salespeople to spend more time on customer interactions versus internal quoting steps. The sales cycle and rep productivity optimization from CPQ can generate quick revenue growth and better customer configuration experiences. On the other hand, fuller quote-to-cash capabilities add extensive backend financial automation, contract management, and post-sales order processing that may overcomplicate sales motions rather than simplify them. 

Companies seeing the greatest opportunities in fine-tuning the customer-facing quote experience itself can gain better traction from targeted CPQ tools. Evaluating where product intricacy and lost selling time drag on growth guides the solution choice.

Find & configure your best billing option

When evaluating SaaS accounting and operations solutions to optimize everything from your quoting through collections, you’ll need to decide between end-to-end quote-to-cash (QTC) systems versus more specialized configure-price-quote (CPQ) tools.

QTC solutions provide unification of financial processes under one umbrella—spanning marketing, sales operations like quoting, fulfillment, billing invoices, payments, and maintaining customer relationships. This integrated approach can maximize workflow efficiency, data continuity, and cross-departmental alignment. However, QTC requires heavy integration and process change management.

Alternatively, CPQ solutions focus deeply on enhancing the quote generation experience through rules-driven pricing, guided selling functionality, and streamlined proposal documentation. This directly accelerates quoting for sales teams. Yet CPQ tools need to seamlessly connect with downstream functions like contracts, invoicing, etc.

Ultimately, if you’re experiencing the greatest inefficiencies or loss of business during pre-order configuration and sales quoting stages, you may benefit most from targeted CPQ capabilities. However, if you need to connect decisions across departments surrounding a customer from acquisition to renewals, then you may want to invest in a QTC solution.

Want to start improving your quote-to-cash process before you start throwing your budget at these tools? Check out our Quote-to-Cash checklist—a comprehensive guide that’s designed to streamline your sales workflow and stop revenue leakage.

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As year-end approaches, budgeting becomes a pivotal exercise for SaaS finance teams, requiring careful attention to both strategy and detail. However, the process offers more than just balancing numbers—it’s an opportunity to set the financial tone for the coming year and position your company for long-term success. By implementing proven tactics, you can transform your budgeting process into a strategic advantage that drives smarter decision-making and resource allocation. In this post, we explore five practical strategies, shared by finance experts CJ Gustafson and Ben Murray, that will help you build a more effective and resilient budget for 2025.

9A+3F: The Forecasting Formula for Accurate Year-End Projections

Instead of simply forecasting based on gut feel or historical data alone, 9A+3F (nine months actuals + three months forecast) offers a way to anchor your projections in reality while allowing room for predictive insights. This formula ensures you’re working with solid data while adjusting for future possibilities.


Tactic:
Use the 9A+3F model to continuously monitor and adjust your revenue forecasts throughout the year. By the time you hit the budgeting season, you’re operating with both accuracy and insight. In practice, this means not waiting until Q4 to adjust, but consistently updating your model as new data emerges.


Key Insight:
Tracking key metrics like gross revenue retention (GRR) and net revenue retention (NRR) alongside your 9A+3F calculations can provide better visibility into customer churn and expansion opportunities, helping you refine your forecast accuracy.

Mastering Headcount Planning: A Data-Driven Approach

Headcount is one of the most significant budgetary line items for any SaaS business. Both CJ and Ben emphasize the importance of accurately forecasting headcount and getting precise about whether you’re hiring for approved, active, or anticipated roles.


Tactic:
Implement a “headcount envelope” strategy where you set a maximum allowable number of employees in each department for the year and phase hiring over quarters to manage costs. Aligning your hiring plan with your product roadmap or go-to-market strategy ensures that you only hire when absolutely necessary, and it prevents over-budgeting based on unrealistic recruitment timelines.


Key Insight:
Incorporating backfill roles and attrition forecasts offers flexibility in your hiring plan. Anticipating delays in hiring creates a natural buffer that helps ensure the budget stays on track.

Top-Down Meets Bottom-Up: Optimizing Budget Allocation

Rather than treating top-down and bottom-up budgeting as opposing forces, CJ advocates for harmonizing the two approaches. The idea is to set strategic, high-level targets from the leadership team while allowing department heads the autonomy to allocate resources based on their granular understanding of day-to-day needs.


Tactic:
Work closely with department heads to establish a budget envelope—a maximum resource allocation per department—that ties directly into the organization’s overarching priorities. For example, if the company is targeting a 15% revenue increase, the sales and marketing budgets should reflect investments needed to support that goal.

Key Insight:
Creating a prioritization framework helps departments focus on essential initiatives and align their budgets with core objectives, preventing overextension of resources.

Managing Budget Variances: Prepare for the Unexpected

As CJ points out, every budget will be wrong to some degree, but the key is preparing for how wrong it might be. Rather than creating budgets that are “pinned to the penny,” building in buffers and managing expectations around variances is essential.


Tactic:
Establish a variance management process where departments are required to present a contingency plan alongside their budget proposals. This could include reducing discretionary spending like travel and training in case of underperformance or delaying certain initiatives until later in the fiscal year when actuals are clearer.


Key Insight:
Tracking under-utilization of allocated budgets early on allows for strategic reallocation of funds to more critical initiatives.

The Role of Post-Mortem Analysis in Budgeting

A budget is only as good as the lessons you learn from past performance. Conducting post-mortem reviews isn’t just about evaluating where things went wrong but identifying what worked—and why.


Tactic:

Hold quarterly post-mortems with department leaders to understand where the budget fell short or over-performed. Incorporate this feedback into your next budgeting cycle, especially when reviewing assumptions around headcount, revenue targets, or non-people-related expenses like software and travel.

Key Insight:

Transforming post-mortems into cross-departmental discussions can enhance alignment and foster insights that drive more effective budgeting across the organization.

Make 2025 Your Most Effective Budgeting Year

By adopting these actionable budgeting tactics, you can elevate you annual budgeting process into a powerful strategic tool. Whether you’re refining your forecasting models or aligning top-down targets with bottom-up insights, these proven approaches will help you better allocate resources, manage variances, and set your organization up for financial success in 2025.

For an in-depth discussion on these budgeting tactics and more insights from CJ Gustafson and Ben Murray, watch the full webinar on-demand.

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Webinar

Budgeting from the Front Line: Proven Tactics to Nail Your Annual Budget

Enter your 2025 budget season with confidence! Join finance leaders CJ Gustafson and Ben Murray for this hands-on master class as they share proven tactics for tackling budgeting.

Aired on August 21, 2024 

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Simplify your annual budget planning with these guides

Download the materials and templates referenced on this webinar including:

  • The webinar deck
  • Annual Budgeting Cheat Sheet
  • Budget Process Overview
  • Budgeting Department Excel template
  • Budgeting Travel Excel template

Get ready to elevate your budgeting strategy with actionable insights and practical guidance.

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About the experts

CJ Gustafson is a startup CFO by trade, and writer / podcaster at mostlymetrics.com at night. Before he became an operator, he worked in private equity and management consulting. CJ thinks it’s cool to be a fan of business, and discusses SaaS metrics at parties.

Ben Murray, known as The SaaS CFO, has over 25 years of experience in finance and accounting within the airline and software industries. He advanced from financial planning and analysis to serving as CFO for founder-owned and private equity-backed SaaS companies. Ben began his software journey in 2004 at a public healthcare tech company. In 2016, he started a blog on SaaS metrics and finance, which has grown into a popular newsletter with over 70,000 subscribers.

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.

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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. 

Why? 

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