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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The QuickBooks SaaS Story: Can You Relate?

You’ve been there, right? Your QuickBooks instance was doing just fine in your company’s infancy. But now you’ve got hundreds of customers, and the FinOps debt is piling up.

While QuickBooks was initially a great option for your business, you now need to support more complex financial operations and reporting functions. QuickBooks wasn’t built for B2B SaaS or subscription-based businesses, so finance teams create complicated workarounds to make it viable. At some point, your team has to admit it’s just not a good option and begin looking at an ERP, which is a necessary move. That process often looks something like this:

We know exactly how disruptive moving to an ERP can be for a SaaS business. While it may be the best next step at some point, that doesn’t make it the best next step today.

In this post, we’ll help you understand if now is really the best time for you to transition to an ERP, and if it’s not, how Maxio can help you extend the life of your QuickBooks account instead.

5 Signs You’re Outgrowing QuickBooks

Unfortunately, there’s no silver bullet for knowing exactly when to call it quits with QuickBooks. Some might say it’s after you reach a certain ARR or employee count threshold. But in reality, the life of QuickBooks has less to do with how much ARR you’re managing and more to do with how sophisticated your business operations are. 

For example, QuickBooks wasn’t built to manage subscription revenue and recurring billing, especially if you have sales-negotiated contracts. It also doesn’t provide all the essential SaaS metrics and analytics necessary to manage, grow, and retain customers or connect with customer relationship management (CRM) systems. All of these challenges add up to make life pretty difficult in the back office. 

While there’s not a single moment you can point to, here are a few signs that you may be reaching the end of your QuickBooks lifecycle.

Your board is pressuring you to switch to a subscription model.

Challenge

Once your company acquires enough customers to prove product-market fit, your board starts to pressure you to adopt a subscription model. Subscriptions mean recurring revenue streams for the business. This is good for you and good for the board, but it’s going to be a nightmare for invoicing in QuickBooks. 

QuickBooks wasn’t built for subscription businesses. “Recurring transactions” is the closest thing it has to a recurring billing function, but that’s like using a band-aid when you need stitches. 

To fill in the gaps, you rely on a spreadsheet for invoice scheduling and visibility into cash flow. However, invoicing is often missed, late, or incorrect. Additionally, late invoices tend to negatively impact cash flow.

Solution

Maxio simplifies your recurring billing so invoices are fully managed and scheduled when a contract is won. This ensures invoices go out on time and provides you with the visibility you need into your business’s health. 

With Maxio, you can: 

  • Process orders 
  • Manage renewals and invoices 
  • Manage upgrades, add-ons, and extensions 
  • Create custom invoice themes 
  • Include subscription dates in line-item descriptions 
  • Calculate sales tax 

With our complete dunning and collections function, you can also reduce Days Sales Outstanding (DSO) to maximize cash flow.

Investors are asking for metrics you can’t produce.

Challenge

You won’t find subscription metrics in QuickBooks. Without the ability to dig into MRR, ARR, churn and retention (logo and dollar), and customer lifetime value (CLV) within your billing/invoicing engine, SaaS businesses must use spreadsheets to compensate again. 

While QuickBooks does provide basic general ledger functionality, that alone isn’t enough for a SaaS business. Some businesses will try to force a CRM like Salesforce to provide SaaS metrics like MRR or ARR, but these quickly get out of sync with numbers tracked by the finance team. 

It’s one thing to go back and forth internally over how you arrived at a certain number. It’s another thing entirely to have the same discussion in front of potential investors or, worse, have a potential investor call out an inconsistency. Shaky SaaS metrics erode investor trust and call into question the integrity of your financial operations. If you have this problem, it’s not a matter of if but when you need to level up from operating in just QuickBooks alone.

Solution

The Maxio analytics engine is the most optimized subscription analytics engine in the market, delivering accurate and real-time insight into all of your key SaaS metrics, including MRR, ARR, dollar churn and retention, logo churn and retention, subscription momentum, cohorts, CLV, and more.

Because these metrics are built from the same financial transactions that generate your GAAP revenue and invoicing, they’re the most accurate subscription analytics you can get.

You’ve started color-coding your spreadsheets.

Challenge

You need contracts, invoices, and revenue recognition schedules to produce GAAP-compliant revenue reports and correct deferred revenue. But QuickBooks wasn’t built to handle recurring invoicing (at least not well). 

As a workaround, you’re likely augmenting the work in Excel. However, as you acquire more customers and introduce more complicated sales-negotiated contracts, the spreadsheet starts to take on a life of its own. You’re left with a color-coded mess filled with complex formulas and error messages.

Solution

Maxio manages your revenue and invoicing schedules, contracts, and transactions. It also reports the revenue and deferred revenue you need to stay GAAP compliant. Tightly integrated with QuickBooks, Maxio records and reports on all key revenue numbers, so you don’t waste time and energy wrangling with spreadsheets or worrying about data inaccuracies. Built-in revenue integrity checks ensure you won’t overreport or underreport. You’ll know immediately if numbers are out of balance.

Finance, sales, and customer success data are scattered across systems.

Challenge

QuickBooks doesn’t integrate well with Salesforce and other CRMs if at all, which forces your team to manage customers and orders in a separate system that isn’t connected to your financial systems. That means sales teams who work exclusively in a CRM will see ARR, MRR, churn, retention, and other metrics that don’t align with the accurate picture produced by the finance team. 

This causes you to spend too much time and energy trying to get your team on the same page with a shared understanding of performance against your key business metrics.

Solution

Maxio bridges the gaps between finance, sales, and customer success teams with a single source of truth. This is critical for upgrades and expansion opportunities, renewals, ongoing account management, and updating sales teams on payment and invoice status for commission insights. Our direct integrations with CRMs such as Salesforce, HubSpot, and Pipedrive close the gap between sales, finance, and customer success teams by providing a standard view of each customer’s orders, contracts, transactions, invoices, payments, and renewals. 

With Maxio, you can close an opportunity in your CRM and book it in Maxio with complete revenue schedules, analytics data, and invoicing. In seconds, you can fully automate the process or insert a finance checkpoint to approve orders, from closed business to emailed invoices.

You’re overly protective of your spreadsheet.

Challenge

There are many things to take obsessive ownership of in a growing SaaS business: company culture, the go-to-market strategy, and even coffee. But only desperation and nightmares of broken formulas can drive you to slap the hand of anyone who dares touch your sacred spreadsheet. You know your energy is better spent elsewhere, but the headache of possibly breaking your spreadsheet has caused you to impose maximum-security permissions. 

With all these disconnected, moving parts, it’s easy to see how and why QuickBooks and spreadsheets get out of sync. When this happens, it’s often a “silent failure.” Silent failures are the scourge of finance teams because they often go undetected. When finally detected, they cost hours to track down, diagnose the root cause, and fix. Over a year, this adds up to a tremendous amount of wasted time and money. 

When uncovered during an audit or due diligence, your credibility can be damaged; worse, you may see adjustments to valuations and deal terms.

Solution

Maxio performs constant data checks to minimize risk and ensure: 

Contract Value = Revenues Scheduled = Invoices Scheduled 

These checks are in place to help you recognize all the revenue you’re entitled to recognize and invoice for all of the contract elements you are entitled to invoice. You receive an immediate alert if any of these values fall out of balance. 

Moving from manual processes to automation with Maxio means you won’t miss renewals/invoices or incorrectly recognize revenue, which could jeopardize your enterprise value.

Practical Reasons to Extend the Life of QuickBooks

With all these headaches, why do we suggest implementing a financial operations tool rather than moving to an ERP like Intacct or NetSuite? It’s not just because we’re big fans of Maxio. (Although, there is that.) There are many practical reasons to avoid adopting an ERP too early in your growth cycle.

It’s expensive.

The license fees for ERP solutions are costly and typically require a multi-year commitment. It wouldn’t be outlandish to estimate that a large ERP, like Intacct or Netsuite, will cost you upwards of $100,000 annually. If you can delay the adoption of an ERP for just 3 years, that’s $300,000 in cost savings.

There’s a lengthy implementation time.

Depending on your stage of growth, implementing an ERP can be time consuming, typically taking 4 – 12 months. It is often necessary to work with one of their third-party professional services partners.

It’s disruptive.

Implementing an ERP successfully requires a dedicated full-time employee to oversee the process and another to maintain day-to-day operations. However, for growing B2B SaaS businesses, resources are often prioritized for engineering, sales, and marketing over finance and administration. It’s unlikely your finance team has the extra capacity to manage the business and make all the necessary business process and configuration decisions in a timely manner.

Why Not Extend the Life of QuickBooks by Supplementing with Spreadsheets?

There are several challenges with managing your subscription SaaS business with QuickBooks. 

One challenge you’ll encounter is problems invoicing for subscriptions in QuickBooks. While QuickBooks has a recurring billing function, it can’t handle recurring invoices with variable amounts, a cornerstone of subscription SaaS businesses. Without managing this directly in QuickBooks, you’ll have to create a separate tab in your spreadsheet for invoicing schedules. 

If you have a complicated invoicing schedule, you’ll have to set calendar reminders so you don’t forget to send out invoices. If you miss one and forget to send an invoice, you’ll effectively “lose” ARR due to a simple, clerical error. 

Your system will be highly susceptible to human error once you augment your work in QuickBooks with spreadsheets. Because you’re manually completing journal entries in QuickBooks from rev rec schedules in your spreadsheet, a simple contract change can wreak serious havoc downstream when it comes time to close your books. 

Finally, you’ll still be accountable for producing SaaS metrics, even if those aren’t readily available in QuickBooks. Perhaps you can create yet another tab in your spreadsheet to calculate essential metrics like ARR, CAC, and CLV. 

The problem is that formulas aren’t always applied consistently. Since there’s no governing body for SaaS metrics like there is for GAAP financials, many of these terms are up for interpretation. 

As you can see, supplementing QuickBooks with spreadsheets alone is a largely error-prone process that ultimately opens you up to more risk than it is worth. It’s more of a stop-gap than anything; stop-gaps aren’t solutions.

Extend the Life of QuickBooks with a Subscription Management Platform

With a subscription management solution like Maxio, you can scale your financial operations significantly without the expense of an ERP or the headache of spreadsheets.

According to Jon Cochrane, VP of Strategy at Maxio, “If you want to extend the life of QuickBooks, you need an automated way to bill, collect, and report revenue.” That’s precisely what Maxio is. Maxio is a billing and financial operations platform designed to sit between your CRM and general ledger to streamline financial operations and reporting.”

Maxio’s bi-directional QuickBooks integration eliminates manually updating QuickBooks with Maxio transaction data and mitigates the risk of investors spotting errors in your spreadsheets. Maxio generates rev rec and invoicing schedules from transaction data pulled directly from your CRM. 

You can also automate invoicing directly from Maxio and even set specific parameters for email cadences for A/R management. In terms of reporting, Maxio’ SaaS metric reports use your real transaction data to generate metrics, standardizing the application of formulas and removing speculation about where specific numbers came from. 

Finally, you never have to worry about human-sync errors between your spreadsheets and QuickBooks. Maxio continually scans for discrepancies in your numbers and alerts you when out-of-balance accounts require your attention. 

All in all, adding a billing and financial operations solution to QuickBooks is a fraction of the cost of transitioning to an ERP, and it takes mere weeks to implement rather than months. Moreover, because Maxio integrates with ERPs and smaller ledgers like QuickBooks, you can continue to reap the benefits of Maxio even after you have outgrown QuickBooks once and for all.

When is it Time to Switch to an ERP?

Even though it may not be as soon as you think, there will come a time when you do need to switch to an ERP. More often than not, this has less to do with the size of your company and more to do with the sophistication of your business model. 

One of the most common reasons companies invest in an ERP is the decision to go international and operate that leg of the business as a subsidiary. Once you start introducing multiple entities, it can be challenging to keep everything straight without a more complex system. 

The other primary reason to switch to an ERP is in the event of a merger or acquisition. With multiple companies’ financials being consolidated, the ability to manage more complex data sets becomes crucial. 

These are not the only reasons to switch to an ERP, but they are by far the most common ones. Contrary to popular belief, the main takeaway is that ARR and headcount are not the primary catalysts for switching to an ERP. 

The nice thing about a billing and financial operations solution like Maxio is that it scales with you as you transition to an ERP. Maxio’ integrations with Intacct and NetSuite marries the best of an ERP to the flexibility and SaaS focus of Maxio.

For practical insights and strategies on ERP implementation, check out our blog post on How We Implemented NetSuite in 8 Weeks. This comprehensive case study highlights Maxio’s successful transition and offers valuable tips for your own ERP journey.

Closing Thoughts and Key Takeaways

While switching to an ERP sooner rather than later may be tempting, there’s a substantial financial upside to putting off the transition. Delaying the switch for even a couple of years could mean the difference in hundreds of thousands in cost savings. 

While managing this delay by augmenting key financial operations in spreadsheets has been the norm for most SaaS businesses, this is actually not sustainable due to its high susceptibility to human error. 

A billing and financial operations platform like Maxio can effectively extend the life of QuickBooks for your team without the headache of spreadsheets. Interested in learning more about how Maxio can help you extend the life of QuickBooks at your company? Talk to an expert today, or sign up for a free demo to learn how Maxio can help your business grow.

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“Measure what matters.” That’s one of our favorite sayings at Maxio.

Sure, your teams may say they care about their OKRs, KPIs, etc, but if you don’t have the right tools to track those metrics and report on them regularly, you have no way of knowing if your day-to-day work is contributing to those goals.

For starters, it’s incredibly difficult to gather real business insights when your data lives in disparate systems. Without visibility into key metrics like churn rate, customer lifetime value, and user retention, it’s impossible to understand what’s driving growth.

This is why tracking your team’s data on a centralized SaaS dashboard is so important. 

In this article, we’ll explore common challenges with gathering SaaS metrics and how purpose-built dashboards can help your teams provide real business impact. Let’s take a look.

What are SaaS dashboards?

A SaaS metrics dashboard is a visual display that centralizes subscription data and metrics for SaaS companies. Packaged in an easy-to-use interface, SaaS dashboards transform raw analytics into actionable business intelligence. 

Rather than digging through spreadsheets, your executives can use these dashboards to visualize key SaaS metrics on demand through interactive charts and graphs. Some common dashboards provide insights into metrics like customer acquisition, account expansion, churn risk, recurring revenue forecasts, sales performance, and more.

For example, Maxio’s Days Sales Outstanding (DSO) dashboard helps Finance teams calculate DSO on a monthly, quarterly, or annual basis to supplement the way they build their financial forecasts.

By consolidating all your SaaS data into a customized dashboard, your teams can get visibility into what’s really driving business growth. Whether it’s improving your net revenue retention rate or reducing subscriber churn, SaaS analytics dashboards help make progress more transparent so you can course correct based on real data (versus gut instinct).

Benefits of using SaaS dashboards: Better data, better decisions

SaaS companies that adopt data dashboards position themselves for smarter decision-making and streamlined operations. Plain and simple. Let’s explore some of the top reasons SaaS businesses should invest in analytics dashboards.

1. Centralized access to critical SaaS metrics

Rather than compiling readings from disparate sources, SaaS dashboards enable users to monitor their most important metrics from a unified analytics tool. This single source of truth helps growth companies make better business decisions as they navigate the SaaS maturity curve.

Important metrics like subscriber growth, churn rate, and recurring revenue get updated automatically instead of through manual data entry. Visualizations transform complex metrics into intuitive charts on role-based dashboards. Your executives can also use these dashboards to gain visibility into the health and trajectory of subscription sales and account expansion initiatives.

Centralized data access also surfaces unexpected or hidden correlations through cross-metric analysis. For example, linking support ticket volume to account churn may reveal opportunities to improve retention through superior customer service. Without integrating SaaS datasets, these types of actionable insights will just get lost in the gaps.

In short, having all the pieces of the subscription sales and account management puzzle in a centralized dashboard clarifies which knobs you should be turning to drive business growth.

2. Greater visibility into business performance

SaaS dashboards dismantle the departmental data silos that restrict leadership’s view into core operations. By consolidating analytics into interactive, visual reports, your teams will gain transparency into performance across the organization—not just what’s happening in their department.

Stakeholders ranging from the sales team to the C-suite can review insights into revenue growth, customer engagement, and account health on their own time. Not to mention the customized views that most dashboards are capable of producing that ensure each user sees the most relevant key performance indicators (KPIs) for their role.

For example, the sales dashboard tracks new customer acquisition rates alongside the net promoter score (NPS) from customer success. If NPS declines among recent cohorts, leadership can correlate sales practices to churn predictors and coach sales reps accordingly. Or, the finance dashboard reporting on profitability margins can help your sales team right-size pricing and identify expansion opportunities.

3. Deeper understanding of business needs

SaaS analytics dashboards deliver more than static snapshots of your subscription data—they also give teams a much deeper understanding of the overall health of a business.

Rather than deciphering abstract figures on a spreadsheet, stakeholders can generate custom dashboards showcasing the key performance indicators that are most relevant to them. Your team members can then use these interactive interfaces to take the SaaS metrics that are most relevant to their department and turn them into easy-to-understand visuals.

For example, an executive may notice churn creeping upward on their KPI dashboard. With just one click on that churn metric, they can filter the dashboard view to the customer segments that are driving churn.

The ability to drill down into your business’s most important metrics ultimately helps eliminate any gaps that may exist between your data and strategic decision-makers. And while you don’t have to be checking your metrics 24/7, SaaS companies that leverage these dashboards will always have a better pulse on subscription performance than their competitors.

4. More user-friendly than spreadsheets

While spreadsheets are fine for storing subscription data, SaaS dashboards ultimately transform your metrics into intuitive visualizations that your teams can easily refer back to. Charts, graphs, and gauges allow users across different skill levels to digest insights quicker as well.

Fortunately, it’s not too difficult to implement some simple dashboard design principles to make your dashboards more readable. And you don’t have to be an expert designer either. Many popular SaaS dashboard tools come pre-built with clean layouts, thoughtful color coding, and whitespace that helps users focus on what matters most.

On the other hand, spreadsheets often require manual number crunching and formula building to derive meaning. And once you’ve done all that, there’s no guarantee that they’ll be easy to read. Dashboards, meanwhile, take care of the heavy lifting behind the scenes so users can spend most of their time acting on insights instead of processing data and trying to build out reports.

What SaaS metrics and KPIs belong on your dashboard?

With endless data available, determining the most crucial SaaS KPIs to monitor can be challenging—but not if you have the right SaaS reporting tools. Once you’ve chosen an analytics platform to build your dashboard with, you just need to come up with a few key performance indicators (KPIs) that your team members can rally around.

Throughout this section, we’ll cover the essential SaaS subscription metrics across customer acquisition, account expansion, and retention that you should be tracking on your teams’ dashboards.

Here are the SaaS KPIs you should consider tracking:

MRR and ARR

Monthly recurring revenue (MRR) and annual recurring revenue (ARR) are crucial SaaS metrics that quantify predictable revenue streams. MRR allows companies to monitor subscription performance month-over-month. Meanwhile, ARR projects future revenue based on the current subscriber base over the next 12 months. Tracking MRR and ARR over time provides visibility into growth and retention trends. Both metrics spotlight the overall health of the recurring revenue engine that sustains SaaS businesses.

Customer acquisition cost (CAC)

Customer Acquisition Cost (CAC) measures the average cost to acquire a new paying customer. By factoring sales and marketing expenses required to generate new business against net new customers, CAC spotlights spending efficiency. Monitoring CAC ensures customer growth remains profitable over the long term. No revenue metric on a SaaS dashboard offers more useful insights than keeping tabs on CAC to optimize and forecast budget needs per company growth objectives.

Customer lifetime value (LTV)

Customer Lifetime Value (LTV) represents the average revenue generated by a customer throughout the entire lifespan of their relationship with the SaaS company. Comparing LTV or CLTV to CAC helps determine overall business profitability. Monitoring LTV also assists with budgeting for customer acquisition and gauging whether accounts warrant additional investment for retention or expansion. Given its role in quantifying long-term subscriber value and sustainability, LTV deserves a top spot on any analytics dashboard.

Average revenue per user (ARPU)

Average Revenue Per User (ARPU) quantifies net revenue driven by the average customer account over time. An increase in ARPU signals successful upsells or add-on purchases. Meanwhile, declining ARPU could reflect lagging feature adoption or reveal an opportunity for optimized packaging and pricing strategies per customer segment. Monitoring ARPU benchmarks whether existing accounts expand meaningfully amid efforts to grow the customer base.

Customer churn

Customer churn represents the percentage of customers that discontinue subscriptions over a given timeframe. Because acquiring new customers costs more than retaining existing ones, managing churn is critical. Churn dashboards monitor cancellation trends, identify at-risk accounts, and inform retention programs. No metric better indicates growth troubles and renewal optimization opportunities than sudden or excessive customer churn.

Customer retention

Customer retention measures the percentage of subscription customers that continue service during a given timeframe. Retention ratios demonstrate the stickiness of a SaaS product suite and inform budget planning. Tracking retention over the lifetime of a customer cohort also spotlights opportunities to improve long-term engagement through initiatives like customer success programs or loyalty incentives. Much like churn, monitoring retention rate trends forms a health check on the most profitable growth lever – expanding within existing accounts.

SaaS dashboard examples

There are hundreds of software-as-a-service dashboards used at companies every day to track everything from product launches to marketing campaigns to employee headcount. In other words, if you can collect data around a business function, chances are you can visualize that data on a dashboard.

Here are some SaaS dashboard examples across sales, marketing, and finance that you can use as a reference.

Sales dashboard: Geckoboard example

A Sales dashboard offers insights into customer acquisition and pipeline performance to inform staffing, activities, and tools for driving growth. Tracking key metrics like lead generation, sales cycle analysis, conversion rates, and rep-based trends helps keep the focus on strategic priorities. 

These dashboards also help identify potential coaching opportunities to assist sales teams in meeting their revenue goals. With an analytical lens on sales operations via customized dashboards, SaaS leadership can foster data-driven decision making for sustainable business growth.

As an example, here’s a sales pipeline dashboard from Geckoboard. Using a dashboard like the one shown here, Sales teams would be able to view their quarterly performance, average deal value, sales cycle lengths, highest value opportunities, and more all in one place.

sales pipeline dashboard from Geckoboard

Marketing dashboard: Zoho example

A Marketing dashboard delivers visibility into campaign performance, lead generation, pipeline velocity, and the return on marketing investment. Monitoring these metrics enables data-driven decisions on budget allocation, channel mix, creative assets, and content strategy. 

Marketing dashboards also quantify the impact of specific programs on acquisition and retention. By linking campaign analytics to sales outcomes, teams can optimize activities for the highest yield at the lowest cost.

This Google Ads analytics dashboard from Zoho is a great example of the insights busy marketing teams can plug into one place. Within this specialized dashboard, performance marketers can study their ad conversion rates, average cost per click, and compare ad performance over a five-month period.

Google Ads analytics dashboard from Zoho

SaaS metrics and analytics dashboard: Maxio example

SaaS analytics platforms like Maxio consolidates key subscription data into customizable dashboards for comprehensive business visibility. 

Maxio’s centralized interface tracks revenue metrics like MRR and ARR in real time while monitoring customer health via churn, retention, and engagement scores. These financial views also assist with cash flow, billing analytics, and financial planning activities. 

With an out-of-the-box dashboard aligning to common SaaS KPIs, platforms like Maxio allow companies to focus on improving their SaaS product, user experience, and making better business decisions instead of report building.

Maxio dashboard

Why not use a spreadsheet instead?

While spreadsheets like Excel provide basic data tracking, they fail to deliver the automation, integrations, and customization that a growing SaaS business needs to stay agile.

For high-growth startups, spreadsheet templates quickly become inadequate when you factor in the rapid pace of growth, vertical shifts, and financial ups and downs that are common with these types of businesses.

Spreadsheets are also notoriously difficult to collaborate inside of. Dashboards, however, centralize important insights by pulling data from many different integrated data sources. This way your team doesn’t have to assign spreadsheet management and maintenance to one person. 

And finally, spreadsheets just weren’t built to turn your business’s KPIs into meaningful data visualizations. At the end of the day, choosing to upgrade to a SaaS dashboard will give your entire team an intuitive visual interface to uncover data patterns, track performance trends, and ultimately make better business decisions.

Using Maxio to monitor your SaaS metrics and analytics

So there you have it. Now you know the metrics you should be tracking, what makes central SaaS dashboards a must-have tool across teams, and you even have a few examples of dashboards to reference.

Now, all you need is a platform to help you build these dashboards to use across your own organization. This is exactly why we built Maxio. Our platform helps SaaS businesses master core metrics around customer acquisition, account expansion, billing, finance, and more.

Want to start making better decisions about the future of your business? Schedule a demo with our team to get started.

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Your Plug-and-Play SaaS Metrics Dashboard

In this template, you’ll find a comprehensive set of pre-built SaaS metrics (that you can trust) to wow investors and make key business decisions with confidence.

Chart your path to profitability with metrics like:

  • Subscription Momentum (ARR, customer count, average ARR)
  • Churn & Retention (churn rate, renewal rate, net revenue retention)
  • Customer Lifetime Value (CLV)

Have you ever looked at your competitors that claim to be serving a ‘billion dollar market’ and wondered, “there’s no way their TAM is that large!”

If so, you’d probably be right. Sure, a founder could quickly spin up an idea of what their slice of the market looks like to pique the interest of the investors, but nine times out of ten, these claims don’t translate to actual paying customers.

But before you go pointing fingers at these founders, you have to understand that there are plenty of myths surrounding how total addressable markets (TAMs) are actually calculated and understood — we’ve dubbed these as the “5 myths of market sizing.” We even recorded a whole webinar on it which you can watch here.

In this article, we’ll be debunking these myths around TAM analysis and show you how to use this data to make better business decisions.

Defining TAM and SAM

Before debunking these myths around market sizing, we need to agree on some key terminology:

Total Addressable Market (TAM): TAM refers to the total market opportunity that is available to your company in a perfect world where you have the ideal product offering and 100% market share. Think of it as the entire universe that your product orbits in.

Serviceable Addressable Market (SAM): Also called Served Available Market, this is the subset of the total addressable market that you can realistically serve given your current products, pricing, processes, partnerships, and overall business model.

For example, if you’re launching new telemedicine software, your TAM may consist of all healthcare spending globally that’s expected over the next decade. It sets the outer bounds for what’s possible.

In contrast, your SAM factors real-world constraints on your end-user audience (e.g. developed countries with widespread smartphone adoption), product capabilities (e.g. urgent care not surgery), and addressable channels (e.g. partners that allow a white-labeled offering). The summed revenues of this subset are what make up our serviceable available market.

As Gustafson puts it, “Half the world is men. That doesn’t mean half the world will buy your shaving kit.” That’s what TAM vs. SAM is all about. TAM attracts headlines, while SAM attracts budgets, and getting both right allows you to make business decisions rooted in reality.

5 myths around calculating TAM

Now that we’ve defined TAM and SAM, let’s explore some of the myths that can undermine your TAM analysis.

Myth 1: A big market automatically equals success

Truth: Targeting a large TAM doesn’t guarantee customer acquisition. Instead, you need to be very deliberate in your product-market fit work to achieve competitive differentiation.

It’s a common fallacy among entrepreneurs and investors alike — the bigger the total market size, the easier it will be to achieve product-market fit, gain customers, and grow revenue. This is a talk track that has left many an entrepreneur with big ambitions and empty wallets.

While pursuing a huge market opportunity might seem enticing on paper, the size of the total addressable market (TAM) prize only matters if you have a credible and differentiated product and value proposition to capture it. Basically, unless you can differentiate yourself based on your company’s niche, GTM model, price, quality of service, etc., you’ll just get beaten down by the established legacy players in your market.

Myth 2: Pre-packaged TAM figures are sufficient

Truth: Forrester and Gartner don’t know your product, customer segmentation, or market penetration. Relying solely on these third-party data sources leads to unrealistic market sizes.

When developing a top-down view of your total addressable market potential, it’s tempting to solely reference the big analyst numbers that are already out there for your target industry or software category.

However, while third-party market research reports can be a helpful jumping off point, their broad conclusions don’t take into account your unique value proposition. In other words, they’re operating off sweeping generalizations about what your product does and who it serves.

Some of the other variables that industry headline figures ignore include:

  • Willingness to pay: Are your users underserved and willing to spend more for your unique benefits?
  • Current market gaps: Does your product fill existing gaps in the market?
  • Impact of realized pricing: How will volume discounts, product bundling, and temporary promotions lower your average selling price compared to list pricing?

If you really want an accurate depiction of your TAM, you shouldn’t rely on industry figures alone. Instead, you can conduct current user interviews, analyze your sales and discovery calls, or review industry benchmarker based on real user data to better understand your TAM.

Myth 3: Your TAM and SAM are the same

Truth: Claiming a market size based on adjacent or existing markets leads to inflated and inaccurate representations of your TAM.

Another common mistake is conflating the total addressable market (TAM) and serviceable addressable market (SAM). However, as defined earlier, TAM and SAM differ fundamentally in their market share assumptions.

While TAM refers to the total revenue opportunity with 100% market domination, SAM factors real-world constraints on product, pricing, partnerships, and promotions to arrive at a realistic group of customers you can actually serve.

Without defining your exclusive wedge into a broader market, new ventures can’t credibly claim multi-billion dollar SAMs in the early years. 

If you want a more accurate depiction of your SAM, you need to start factoring in the following variables:

  • Target personas: Industry, company size, role titles, and tech fluency
  • User behaviors: Current workflows, pain points, and switching costs
  • Direct competition: Incumbents, alternatives, threats
  • Go-to-market: Channels, partnerships, and promotions

By framing your serviceable addressable market against the wider competitive landscape, you can start carving out a realistic path to unlocking your broader TAM.

Myth 4: Adjacent market equals my market

Truth: You can’t claim an adjacent market to overinflate your own market opportunity.

When analyzing your total addressable market potential, it’s tempting to look at hot or rapidly growing adjacent spaces and claim, “Our market is that big!” But no… you can’t point to an adjacent market to inflate your own potential.

Instead, focus on analyzing your direct competitors — products that are targeting the same users or solving the same pain points. Sizing your TAM based on these comparable solutions will give you a better idea of your market potential.

Sure, an adjacent market analysis still provides useful context on general trends, partnerships, and future expansion opportunities, but it tells you very little about the customers you can currently serve.

Myth 5: TAM is static over time

Truth: Your TAM will continually evolve over time.

According to Gustafson, “Markets are continuously evolving based on trends like globalization, consolidation, regulation, and innovation. Periodically reevaluating your TAM allows you to spot new adjacencies before competition stakes their flags there.”

In other words, a TAM analysis is never a one-and-done process. Several different assumptions go into market modeling, including growth rates, churn, and pricing, for example — you need to continually update these assumptions for your TAM analysis to remain relevant.

Additionally, if you aren’t regularly analyzing your TAM, you run the risk of getting stranded in a shrinking niche. By checking in on your TAM, you’ll be able to stay one step ahead of the competition and position your company for future growth opportunities.

How investors view TAM

Beyond your company’s own operators and executives, your TAM projections also inform the way investors think about fundraising and exit planning. Here’s a glimpse into how investors process market sizing assumptions:

Assessing opportunity and exit potential

Savvy investors typically apply various mental models to translate your future TAM into return potential. 

Some of the more common methods for calculating potential ROI include:

  • Target revenue at exit based on comparable exits or expected multiples
  • Required market share to hit target revenue if TAM is much larger
  • Feasibility of capturing required share given competitive assumptions
  • Expected dilution from future fundraising rounds

So even if you have a sizable TAM, investors will still scrutinize your company’s valuation and fundability based on the current trends and dynamics of your market.

Future market direction and evolution

Investors will also assess if your early TAM assumptions show any future potential for longer-term expansion. For example, many enterprise software companies are able to serve multiple verticals and customer segments — would your company be able to expand into an adjacent market? Or serve customers upmarket or downmarket?

Even if you have an incredible niche SaaS product, your company’s future potential will affect how investors assess your funding eligibility and exit valuation.

Timeframe considerations

While your TAM may reach billions of dollars down the road, investors care most about what markets will be accessible to you over the next 3-5 years. In other words, if your $10B TAM realization depends on some rapid shift in consumer behavior that’s decades away, investors will discount projected revenues or extend their projected payback timelines.

3 ways to measure and track your TAM over time

At this point, we’ve dispelled all the myths on TAM claims and have shown you how investors think about your market size from their perspective. Now, let’s explore a few techniques you can use to measure and track your total addressable market over time.

1. Market share analysis

Analyze competitor annual reports, third-party data, and related information like recent job postings, competitor reviews, or recent funding news in your space. Based on this data, you can start to determine if you’ll be able to compete for market share. For example, if the top players in your space represent 60% of total market share, you still have a solid chance of earning your own share of the market. 

2. Study market participation rates

Within your segment, determine how many customers, on average, are looking to switch solutions in a given year based on average market participation rates. If you notice that existing customers switch software vendors every few years, you can expand your future TAM based on these potential customers. The only caveat here is that these future prospects need to be a good fit for your product or service based on the pain points you help solve.

3. Examine the growth of your category

When it comes to measuring your future TAM, you’ll want to factor in how your market is projected to grow or shrink in the near future. You can use historical data from research firms and associations to inform these assumptions; however, you should also factor in external variables as well:

  • Are tech budgets expected to grow/shrink?
  • Is your vertical or sector becoming commodified?
  • Will there be future users experiencing a pain that you’re uniquely positioned to solve?

All of these variables will help you determine how your category is expected to grow or shrink in the future.

Your TAM serves a strategic purpose

In closing, let’s review some of the big takeaways from CJ’s thoughts on how to leverage your TAM correctly.

  1. The size of your market should be used to inform your business strategy, not inflate the egos of your founders and executives
  2. Be sure to draw a clear line in the sand of what your TAM vs. SAM looks like so you can accurately assess your current and future market potential 
  3. Conducting regular TAM analyses will keep your business decisions grounded in reality
  4. Be a student of your market. Keeping tabs on market trends and dynamics will make it easier to adjust your TAM as needed.

Ultimately, TAM exists to help your business leaders make better decisions about your company’s current and future trajectory—but you need the right data to inform your decisions.

If you want more insights on how to use your TAM, check out our full webinar with our CEO, Randy Wootton and guest CJ Gustafson, 5 Myths of Market Sizing: Debunking Common TAM Misconceptions.

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Ready to set your company up for financial success?

I knew Maxio needed to move to an ERP system just a few months after I joined as VP of Finance. 

Having integrated various ERPs over my past 7 years in fast-growth companies, I knew an improvement was needed. Pressure from our investors and internal leadership was intensifying daily as Maxio rapidly expanded, demanding more robust financial tracking capabilities. 

With five total entities, including two international entities, to consolidate; I faced serious headaches without a unified system tying everything together seamlessly. It also became clear to me that our lean accounting team needed tighter controls and separation of duties. I was also managing an inefficient, error-prone process of relying on Excel for financial consolidation and reporting.

If we wanted to scale, we needed to switch from QuickBooks to an integrated ERP platform like NetSuite. 

My hope is that by the end of this article, you’ll understand exactly how we were able to implement NetSuite in just 8 weeks keeping Maxio, our own product, as our order to cash and revenue subledger.  Having Maxio in place through the transition from QuickBooks to NetSuite allowed us to streamline the implementation and saved us hundreds of hours (and even more dollars).

Here’s what the process looked like.

The challenges of switching to an ERP

First, we had to take into account all of the challenges we would face if we wanted to switch to an ERP platform like NetSuite. After all, transitioning to something as comprehensive as an ERP platform certainly doesn’t come without growing pains. 

Implementing an enterprise-level system like NetSuite requires cash, surpassing the costs of our previous QuickBooks setup. The financial investment of implementing was not as high as it could have been since we of course kept Maxio. An ERP migration would also demand substantial time before we went live so we had to wait until we were out of audit season to free up our team. We chose to utilize standard NS functionality vs customizing, saving additional time .

With NetSuite touching so many critical business functions in one integrated system, our accounting team grappled with the unknown at times. Since we chose to keep Maxio, our team only had a learning curve as it related to the NetSuite application. We did not have to plan for revenue recognition configuration because it was already in Maxio. We only had to consider reporting changes and training our people on a handful of processes in NetSuite. 

An ERP doesn’t bend easily to your existing workflows; it asks you to transform processes to fit the software’s design. We had an expert guiding us, but we chose to not customize and keep NS and Maxio standard functionality. Keeping standard functionality helped us go-live faster and more efficiently. We also faced some initial data migration headaches getting historical information structured properly within NetSuite, and mapping our QuickBooks data into a new GL structure to assist with our reporting designs. 

Once we laid out all of the challenges, we were ready to get to work. But we needed to figure out the right order of operations when it came to building our tech stack – this meant implementing an ERP before an FP&A solution. 

Why we implemented an ERP before an FP&A solution

With pressures mounting from leadership and investors, I had to be pragmatic about our order of operations. As much as I valued adding a full-fledged FP&A tool for financial planning and analysis, getting our underlying financial actuals in order took priority. 

Relying on Excel projections and models wasn’t sustainable from accuracy and productivity standpoints as Maxio grew. However, the lack of reliable, consolidated actuals and reporting from our disjointed QuickBooks/Excel setup posed a bigger impediment day-to-day. We couldn’t confidently forecast anything without real-time visibility across our business units. 

Moving to NetSuite provided that missing foundation, giving me the confidence that our reporting was audit-ready and scalable before layering on an FP&A tool.

The best practices that enabled our 8-week ERP launch

Given Maxio’s relative speed in transitioning to NetSuite, I’m often asked how we made it happen without derailing normal business operations. While it wasn’t an easy process by any means, it really boiled down to these four steps:

Securing executive sponsorship

Securing executive alignment early in the process was by far the most vital to our ERP success. 

Unlike other software rollouts that just impact one department, transitioning our financial system would affect almost everyone, and I knew that getting leadership support from heads of Customer Success, Sales, and Product was integral before we even selected NetSuite. Their teams would bear the burden of integrations and process changes too. Rather than going at it alone, I actively solicited executive input during vendor selection.

Once we kicked off the implementation, our executive steering committee met bi-weekly to align on the timeline, resources, and milestones. Having regular touchpoints for guidance, oversight, and course corrections helped us avoid any potential roadblocks we might face during the implementation.

Creating a detailed project plan

Once all our executives were on the same page, our next vital step was creating a comprehensive project plan. Our plan considered key players from Finance, Customer Success, Product, IT, and our expert implementation consultant.

We defined guiding requirements, mapped existing workflows, and identified improvement areas. We also partnered on visualizing our ideal future solution before setting firm milestones. Getting granular on which modules would take priority, our desired configuration, which integrations were essential from the start, and what could get phased in later kept everyone grounded in reality over the 8 weeks.

The Finance & Accounting team developed our full project timeline encompassing risk/dependency management, resourcing/budget, test scenarios, contingency protocols, etc. With my past experience, we were able to develop an aggressive but attainable timeline in line with Maxio’s culture, capabilities, and bandwidth.

This kind of meticulous scoping and project orientation we pursued ultimately helped us prevent scope creep down the line. It also granted us the flexibility to adapt since all teams participated in plotting the course. If you plan on pursuing any kind of cross-functional software rollout, this step is a must.

Defining the target chart of accounts architecture

With finance leading the charge on our ERP selection and rollout, we knew upfront that aligning on foundational elements like our chart of accounts (COA) framework was non-negotiable. Given Maxio’s growth trajectory, we needed our chart of accounts and accounting structural decisions to scale all the way from the early stage to future IPO readiness.

Our CFO had already done a lot of research and analysis to design Maxio’s future state COA before I joined. I did have an opportunity to review this based on my past experience and made a few minor adjustments. One thing to consider is to ensure each segment of your COA has one purpose. For example, do not mix departmental use or location within a natural account. We got granular on new segments and reporting needs from FP&A while ensuring historical continuity for trend analysis. We also sized up ancillary accounting needs around billing, fixed assets, planning modules, etc. to shape the scope. Ultimately, we realigned our COA to balance sophisticated enterprise scalability with intuitive usability for our current needs.

Resourcing accordingly with internal talent and external experts

Once we had our COA structure figured out, we could pursue the rest of the implementation – this meant finding the right blend of internal and external talent to assist with the implementation. As eager as my team was to tackle the NetSuite implementation themselves, the platform’s technical intricacy surpassed our current skill levels. Rather than attempting to upskill them on the fly amidst an aggressive rollout, we took a blended staffing approach.

From a resourcing lens, I relied heavily on a NetSuite implementation expert our CFO had partnered with previously. Her breadth of platform expertise and implementation experience proved invaluable from the planning through the testing stages. Leaning on a seasoned consultant also allowed my accounting managers to focus wholly on data migration, configuration reviews, and training.

Once our consultant was onboarded and ready, we formed a team that was cross-trained across integrated modules like Maxio billing, Salesforce data syncs, and other core Maxio components. Keep in mind, our consultant had not used Maxio in the past and we had to partner up with a Maxio implementation manager. Our team worked through issues together during working sessions so the could fast track the learning curve. 

Ultimately, combining the skills of an experienced consultant and the knowledge of our in-house team is what allowed us to roll out an ERP like NetSuite at such a rapid pace.

Our 8-week NetSuite implementation playbook

Our highly accelerated 8-week NetSuite rollout could seem improbable to some. However, our success actually stemmed from diligent governance, resourcing, and upfront vision setting.

Here is the playbook I would use if I had to implement NetSuite all over again:

1. Garner executive alignment

We gained executive sponsorship across Finance, Customer Success, and Product during our initial software selection. 

Getting leadership support from department heads who would be impacted by this implementation was essential for ensuring a smooth rollout. We actively shared with executives a vision of what our business would like after implementing NetSuite. 

Once the project was agreed upon, our executive steering committee met bi-weekly to align on the implementation’s timeline, resources, and milestones.

2. Conduct rigorous pre-planning

Before we started, we scoped an aggressive 8-week project timeline encompassing milestones, risks/dependencies, and modules in focus for the phase 1 launch. 

I assembled key players within Finance and Implementation to complete scoping and envisioning workshops that would help us determine which modules needed to be prioritized during our launch.  Together we defined guiding requirements, mapped existing workflows, and identified improvement areas while visualizing the ideal future solution.

3. Migrate general ledger data

We had to convert around 24 months of general ledger history from QuickBooks into NetSuite for continuity. 

We chose two styles of converted data.  For one year, we converted balances only. For the most recent year of conversion, since we converted mid-year, we converted transactions. While reconfiguring our chart of accounts for growth, we considered future analytics needs and added new reporting segments. However, we ensured that our key accounts tied to historical trend data remained intact through the migration. Converting historical transactions into this new COA framework helped us prevent any disruptive gaps in our GL data.

4. Allot 4 weeks to testing

We allocated a full month to running transaction testing for standard workflows between the Maxio and NetSuite systems. Resolving workflow kinks prior to launch enabled us to focus wholly on adoption. As you plot out your own implementation plan, allotting additional time to test your workflows is crucial if you want to ensure your data syncs are reliable and to prevent any disruptions down the line.

Within this testing was another conversion of Maxio data into NetSuite. Once we converted our open transitions into NetSuite, we had to compare this against QuickBooks to ensure all our data came over in the conversion.

5. QBO cutover and go-live

Once we were about two months into our implementation, we transitioned all finance transactions from QuickBooks directly into our new NetSuite modules. While the first month-end close was challenging, as typical for ERPs, our systems were now unified. While we are still making ongoing improvements, we were able to reach operational continuity faster by addressing all our systems’ critical workflows prior to full utilization.

Streamline your NetSuite implementation with Maxio

At Maxio, we like to use the phrase, “we drink our own champagne,” when talking about how our own product helps us manage critical finance and accounting tasks – and that includes implementing an ERP like NetSuite. By leveraging our own integration with NetSuite, we were able to save countless hours and dollars to make the transition as smooth as possible.

There are multiple other ways our Maxio + NetSuite integration can help your finance team stop chasing dollars and focus on what’s next:

  • GAAP-compliant revenue recognition
  • Invoice scheduling and highly customizable e-invoicing
  • Milestone-based revenue and invoice management
  • Out-of-the-box subscription metrics and analytics
  • Accounts receivables and collections management

Click here to learn more about the Maxio + NetSuite integration.

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As someone who’s guided SaaS companies through periods of exponential growth, I’ve experienced firsthand the breakneck pace of change that makes forecasting subscription revenue an immense challenge. 

Between unknowns around customer retention, usage fluctuations, and market shifts, obstacles loom around every turn–no two days feel the same.

In years past, I’ve known early-stage SaaS leaders who may have relied on intuition or “gut calls” to drive growth decisions amidst the chaos of scaling. After all, when you have less than 100 customers, it feels like you can keep most of the high-level company financials in your head. But now, basing growth decisions on feeling rather than data just isn’t an option.

This is why it’s critical that you start forecasting future revenue in your SaaS business. No matter what unpredictability your company faces, the ability to construct effective forecasting frameworks allows you to plan future months, quarters, and years proactively–instead of falling victim to whatever economic headwinds stall your growth.

Throughout this article, I’ll be sharing some of the highlights from my recent webinar with Maxio, “Forecast-Ready SaaS Metrics,” so that you can start building accurate revenue forecasts in your business. 

Core Data Sources You Can’t Afford to Miss

For starters, you can’t build accurate revenue projections unless you have access to quality data sources. I’ve known many founders who have leaned on the optimistic side and inflate their projections, while seasoned execs often erred on the side of caution and built their projections conservatively.

Neither of these is a great way to scale a business. At the end of the day, you need facts and figuresçnot hunches–to guide your decisions.

First and foremost, you need a reliable financial reporting system if you want to build a revenue forecasting model. The right tools act as the bedrock for accurate financial models, whether you’re using an accounting platform or a dedicated financial operations platform like Maxio.

Secondly, having access to HR data on your sales team headcount is crucial for calculating key metrics like revenue per FTE. Comparing FTEs historically helps determine if you have enough organizational firepower–or are overextending resources–to deliver expected revenues. No forecast aligned with reality should be made in a vacuum without factoring in your frontline hiring plans and current employee productivity.

Third, reconciling bookings captured in your CRM with recognized revenue numbers can help you maintain data integrity. As Maxio COO Chris Weber suggested on our webinar, tying your revenue down to the penny ensures consistency between your sales projections and financial outcomes.

Lastly, you shouldn’t forget that you can use customer revenue data to gain granular insights into subscription momentum across your customer segments. By breaking your revenue data into customer types, geos, pricing plans, or other critical groupings, you can tailor your assumptions and forecasts to whatever story you’re telling–whether it’s to your board, investors, or your executive team.

How to Build A Forecasting Model With Key Inputs

If you want to build a revenue forecasting model you can trust, you need reliable data.

As a CFO, it’s my job to make sure that companies aren’t making sweeping guesses about their financial performance. And neither should you. Instead, you should take the time to make custom assumptions for each of your major customer groups based on how they actually behave. 

This is where having access to a reliable financial operations platform comes in handy yet again. For example, with Maxio, you can break out the metrics for long-time subscribers separately from newer customers, those on premium plans vs. basic ones, and SMBs apart from enterprises. 

Since each segment acts differently as far as renewals, add-ons, or cancellations are concerned, you’ll get insight by factoring in those unique details across your subscriber base. Additionally, you should ground your model in segment insights rather than overall averages to make your forecasting volumes, revenue, and churn far more accurate.

Another helpful tip I’ve learned when building out a revenue forecasting model is to map your assumptions like expected renewal rates, expansion vectors, and churn risks across your customer types, firmographics, pricing plans, or other categories within your own subscriber base. This way, you can retain enough granularity in your model to steer each lever impacting subscription revenues while right-sizing complexity.

Real-world Use Cases for Building an Accurate Forecasting Model

Following so far? I’ve covered a lot of theoretical modeling advice in this article, so let’s walk through a few real-life examples to tie this all together.

Let’s say you’re providing an enterprise SaaS solution. The company has grown to the point where customers’ needs are getting more specific and it’s becoming necessary to set up sales-negotiated contracts.

In this case, you’ll want to include an extended runway from initial contact to a closed deal. Map out the step-by-step flow of your sales process, incorporating key variables like seasonality or average sales cycle length. Once you’ve accounted for these variables, you can start building revenue projections based on models that reflect the real-world operational tempo and rhythm of your business. Ultimately, this lends authenticity to your forecasting data and can help you uncover trends that would have gotten lost otherwise.

In short: Matching your assumptions to reality = Proactive planning = Greater chance of success in scaling your SaaS business.

Manage Re-Forecasting Efficiently

So, you’ve learned how to build an accurate revenue model. Now what?

Rather than treating revenue forecasts as a one-and-done exercise, you should regularly refresh your models by inputting your team’s most up-to-date performance data and observations. Markets move fast–what was true last quarter likely won’t hold for the current one as competitive dynamics and customer needs evolve.

By continually checking your assumptions against the latest actuals and recalibrating as needed, you can empower your business to nimbly adjust strategies ahead of the curve. These ongoing revisions ensure your planning stays grounded in current realities rather than outdated projections–this is what will give your team the confidence to pursue growth in spite of any market fluctuations.

I also strongly suggest that you should check where your projections were incorrect during the revision process. This is key for ensuring you’re able to accurately forecast your future business performance.

After each forecast refresh, compare your newest projections against earlier ones to detect any mismatches. Review your variances by asking: were we off-base estimating churn rates or growth? If so, you should drill into what specifically caused the differences. Identifying why these deviations happened will allow you to continue refining the accuracy of your inputs over time.

As you’re making your revisions, you should also watch closely for changing trends in your data.

For example, if you notice a subset of customers sharply dropping off, it may indicate it’s time to lower expected renewal rates for that segment in the next forecast. The key is responding to real trends rather than temporary exceptions or outliers that self-correct. Training your team to spot true signals separates helpful recalibration from any potential overcorrection to market noise.

Leverage Your Data for Certainty in Uncertain Times

So there you have it. That’s my two cents on building forecasting models.

As a SaaS CFO who’s advised numerous leading companies, I’ve seen even the most buttoned-up organizations struggle with an extremely volatile and complex market landscape. But leaders who invest early in accurate metrics dashboards and customizable forecasting models give themselves the ability to slice through the confusion and make the right decision, no matter where they’re at in the growth curve. 

If you want to start building your own models, I suggest you start with this revenue forecasting model I’ve pre-built for you. Better yet, if you’re already a Maxio customer, you can pull metrics from the subscription momentum report to use as the initial inputs for this model and start making better decisions about your company’s future.

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Ready to take your reporting to the next level with real-time, drillable metrics?

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

Why connect QuickBooks to Maxio? 

By connecting QuickBooks Online to Maxio, you can: 

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

How it works 

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

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

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

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

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

Graphic image_Maxio Worfklow

Product Details 

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

Sales tax

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

Multi-currency 

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

Product Screen Shot_Quickbooks Integration

Availability and pricing 

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

If you have any specific questions, don’t hesitate to reach out to support@maxio.com.

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As we enter a period of great uncertainty in SaaS, companies are re-examining their payment terms in light of their strategic objectives. Some businesses will look to maximize cash flow by moving from monthly to annual payments, while others may wish to mitigate churn by renewing annual customers on monthly terms.

Regardless of the objective, changes in payment terms can have a significant impact on the business that will not appear on the income statement. For example, a $3.0 million ARR SaaS business growing at 40% and billing annually in advance will collect $4.2 million in the next twelve months, while a SaaS company growing at the same pace but billing monthly will only collect $3.6 million.

Changing payment terms for renewing customers can also significantly, although temporary, impact cash flow. The Billing Change Calculator is designed to easily quantify the cash flow impact of changing billing terms.

Balancing Cash, Retention, and Price

Adjusting payment terms is a balancing act between cash flow timing, customer acquisition, customer retention, and discounts. Annual payments improve cash flow but typically require discounts, while monthly offerings may serve to mitigate churn or streamline adoption but generate less near-term cash.

The downloadable Billing Change Calculator will help answer questions like; if I move 30% of my renewals from annual to monthly payments, and that reduces churn by two percentage points, how will that impact my cash flow? Or, if we shift all new bookings in the coming year to annual payments from only 50% today, and the pre-pay discount is 10%, how will that impact cash?

Payment Term Fundamentals

Payment terms only impact a company’s cash flow to the extent that it’s adding new customers or changing the terms. As such, the impact of payment terms is most pronounced in high-growth companies. Said differently, the annual cash flow from an installed base of customers is the same regardless of whether they pay monthly or annually, and cash flow from the installed base only changes if the terms change. And if you do change the payment terms for renewals, cash flow is only impacted in the first year of the change.

One number to keep in mind when changing payment terms is 46%. When new bookings are spread-out evenly throughout the year, a cohort of annually paying customers will generate 46% more cash than monthly paying customers. This math is also true for the first year after changing renewal payment terms from monthly to annual. 

Conversely, new monthly bookings, or renewals moved from annual to monthly payments, will generate 46% less cash in the first year than if they were annual in advance payments.

The model supporting these percentages is in the Supporting Schedules tab of the Billing Change Calculator.

Variability in Cash Flows

For most SaaS businesses, bookings tend to be lumpy. This may be due to seasonality, quarterly sales cycles, or simply due to large customers. For companies with annual billing, the lumpiness in bookings translates into a lumpiness in cash flow during the year. 

Monthly payment terms, while a disadvantage from a cash flow perspective, have the benefit of eliminating this variability. Cash collection variability, particularly seasonality, can create meaningful operational challenges, which I will discuss in a future post.

The Valuation Impact of Payment Terms

Most SaaS businesses offer a discount for annual payments over monthly ones, which makes intuitive sense to both sides. However, because SaaS businesses trade at a multiple of revenue, and discounts decrease revenue, they have an outsized impact on valuation. The decrease in valuation will equal the annual dollar amount of discounts times the valuation multiple. For a $5.0 million SaaS business offering a 10% discount for annual payments and trading at six times revenue, the valuation reduction is $3.0 million. 

In addition, heavy discounting will lower the company’s growth rate, which will then lower the valuation multiple. 

And one final point; annual payments create deferred revenue, which is deducted from the company’s value in a transaction. This offsets the working capital benefit of advance payments at the time of the transaction.

This is not to suggest that annual discounts are a bad idea. In fact, they may allow the company to avoid raising incremental equity (especially early on), thereby creating significant value for the founders and early investors. I know of one entrepreneur who secured fully paid-in-advance contracts from his first few customers. By doing so, he funded his business without raising a seed or Series A round of equity. 

Scenario Planning Changes in Billing Terms

While billing terms are a powerful operating lever, most SaaS businesses will want to avoid making wholesale changes. There are likely good reasons why the terms were established the way they are now. That said, some businesses will want to increase the flexibility they offer their customers, or they may want to model changes in customer preferences amongst their current payment offerings. 

In addition, some companies may wish to layer usage-based pricing (UBP) models on top of their annual subscription models. UBP is predominately billed monthly and has different cash flow implications.

The Billing Change Calculator is a quick way to model the high-level impact of changes in payment terms on cash flow over the next year. It should be used as a starting point to work through different scenarios and their overall impact on cash. Changes may have a larger or smaller impact than you imagined. Once the billing terms for the upcoming year have been determined, and full cash flow forecast should be built.

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Template

Forecast Your Company’s Cashflow

Need to better understand the cash inflows and outflows of your business? Download the template now to get forecasts you need to make strategic decisions.

Get the template

Everyone knows cash is king

You need to accurately understand your cash needs—both immediate and long term—in order to properly finance your operations today and make strategic decisions in the future.

This free Cashflow Forecasting Template will give you the two reports you need to do that:

A 13-week cash forecast

A payments forecasting template using invoice dates + DSO

Download the template now to better understand the cash inflows and outflows to your business.