SaaS Stories
SaaS Stories is my not-so-secret quest to learn what it truly takes to succeed in the world of SaaS—and I’m inviting you along for the ride! I have the pleasure of sitting down with brilliant minds and industry trailblazers to explore their journeys, uncovering the secrets behind their growth, the gaps they spotted in the market, and what really drives them.
It’s not all smooth sailing—there are challenges, unexpected turns, and moments of reflection where they share what they’d love to change about their journey. Think of it as a candid, insider’s look into the world of SaaS, with just the right amount of curiosity, empathy, and wit.
Join me as I dive deep, selfishly soak up all the insights, and hopefully share a little inspiration with you along the way—one SaaS story at a time.
SaaS Stories
SaaS Finances Decoded - The Finance Mistakes You Can’t Afford to Make
💰 Is your SaaS company scaling… or spiraling? 💰
Many founders focus on product and growth, but neglect the one thing that can make or break their business—financial strategy. In this episode, we sit down with Anthony Nitsos, SaaS CFO and founder of SaaS Gurus, to uncover the financial blind spots that put startups at risk—and how to fix them before it's too late.
🚀 He offers different strategies to whether you're bootstrapped or venture-backed. Managing cash flow and forecasting correctly is the difference between thriving and failing in SaaS and Anthony shares insider knowledge on mastering key financial metrics, structuring your back office for investment, and the strategic decisions that drive long-term profitability.
🔑 Key Takeaways:
✔️ The “Big 5” Metrics Every SaaS Founder Must Track (ARR, CAC, NDR & more)
✔️ Why venture-backed SaaS startups struggle with GTM strategy (and how to fix it)
✔️ Cash flow forecasting myths that lead founders into financial disaster
✔️ Why prepaid annual contracts could be your best weapon for valuation growth
✔️ The biggest financial mistakes SaaS companies make (and how to avoid them)
✔️ The CFO’s evolving role—from number cruncher to strategic business advisor
💡 Whether you're preparing to raise funding, optimize growth, or just keep the lights on, this episode is packed with real-world, no-fluff advice every SaaS founder should hear.
🎧 Tune in now and take control of your SaaS finances before they control you!
Welcome everybody to another episode of SaaS Stories. Today I'm super excited to be joined by Anthony Nitzos from SaaS Gurus all the way is it Michigan?
Speaker 2:Yes, it's in Michigan, Ann Arbor.
Speaker 1:Amazing. Well, welcome to the show, Anthony.
Speaker 2:Thank you, I'd love to be on your show.
Speaker 1:So tell us a little bit about how you got into the SaaS world and why you felt inspired to start something like SaaS Gurus.
Speaker 2:So I have been doing fractional you know, controller, accountant, cfo type of work since 2006. And in 2007, here in Michigan, we got our first SaaS client before anybody really knew what the term SaaS meant. As a matter of fact, we didn't even know what the term was. We didn't even know what the business model was when we first came across them, and then from then on it was a steady kind of trickle of companies here and there. Around 2015, so, fast forwarding about nine years, one of the companies here in Ann Arbor that was a SaaS company that was growing extremely rapidly reached out to me and asked if I'd like to join them full time working for their CFO so not as the CFO myself and I said yes, and that was my first unicorn exit. So that was Duo Security and we exited for about $2.3 billion Nice.
Speaker 1:So that was Duo.
Speaker 2:Security and we exited for about $2.3 billion. Immediately after that, I moved over to another company, also that happened to be in Ann Arbor. That was a Stas company, and very shortly thereafter that company exited for a billion and a half. So I was extremely fortunate in that I had two back-to-back unicorns and, having been a self-employed person for many years before I took those two salaried positions, I decided I really did want to go back to being my own boss, and so I moved back off of the salary space, as it were, back into the entrepreneurial space, and I founded StazGurus as a specialty boutique, fractional CFO and back office shop specifically for pre-revenue up to B round of investment for SaaS companies only because I had that particular expertise now and I found I really, really enjoyed working with founders who are coming up with the coolest new software, and so that's what we've been doing ever since, and that was about 2020 when we started that.
Speaker 1:Sounds like a very exciting mission to be on, and you must be really good with numbers, so you also have a background in human medicine and, of course, finance. How has that shaped where you are today?
Speaker 2:So my original degree is in biomedical science and I actually was accepted into medical school At the age of 18,. I had gotten into an experimental program at the University of Michigan and after I made it through the first year of medical school phase of that, I realized that I really was not the doctor type. This was not something that was of interest to me, and so I made the very hard decision to drop out. I like to share the fact that Michael Crichton of Jurassic Park fame and I share that same particular thing we're both medical school dropouts. However, I think he went and made on a little bit more money than I did. So what do you do with a partial medical degree, Right? That's kind of like one of those. That's kind of a weird situation.
Speaker 2:I ended up in manufacturing. I mean, I'm in Michigan, it was medicine, m is manufacturing. They all start with M, so maybe there was something in the cards there. But I ended up in manufacturing and found that it was really easy for me to transition my knowledge from human medicine into manufacturing, because manufacturing companies are extremely similar to the human body.
Speaker 2:You have blood flow it's cash. You have, you know, a brain that's your information technology. You have departments those are your organs, and you have this, you know product. That's flowing in and out, and we don't need to extend the analogy too much further. So I found that I was really good at identifying root cause problems. For my medical training we always were looking for you know what's the? You know don't treat the symptoms, treat the cause. And so, using that scientific background, was really easy for me to translate that into the manufacturing sector, and so I became a process re-engineer very quickly. It was easy for me to diagnose processes and figure out what was wrong, figure out how to fix them, make sure that the fix was permanent and then move on.
Speaker 2:After that I moved into the IT space, into, specifically, erp implementations, because I had that manufacturing background and on the side I was learning accounting. Because my father told me he said, if you're not going to be a professional in medicine, be a professional in something. And I said well, accounting seems to be pretty straightforward and also pretty interesting way of getting to know a company is knowing their numbers. And so that accounting and manufacturing experience together is what landed me with those ERP implementations. And this was back when there was this thing called Y2K I don't know if you recall that or not Everybody was worried their code was going to blow up, right? And so all these manufacturing companies were scrambling to buy these ERP systems, like you know, fap and SAS. You know what was they calling, I can't remember MFG, pro, et cetera, et cetera.
Speaker 2:And so again, another translation from one career into the other found out that it was actually very easy for me now to take that manufacturing experience because I knew the entire company, add to it the finance and the accounting piece and go forward and implement ERP systems. That unfortunately came to a quick end because by the time 1999 rolled around, unlike Prince who was partying his butt off for that everybody else was shutting down, nobody else was buying ERP systems because back in those days not like NetSuite is nowadays right, it's all in the cloud. Back then it was all on-premise software, on-premise hardware, on-premise software, on-premise hardware, and so it took 18, 24 months for a medium-sized company to implement these systems. By the time they got up and running and debunked and everything was working properly.
Speaker 2:So if you didn't have your software purchased by you, know, basically middle of 1998, you were pretty much, you pretty much weren't going to make it, and so the project started ending and ending, and ending and ending and you know my teams were sitting there on the beach with nothing to do and then, of course, they start to get laid off by the corporate until finally I was literally the last one standing on Thanksgiving Day, just about of 1999. I got the phone call the day before from, you know, my boss, saying hey, you know, we're not going to need you after the end of the year. I was like thanks for the Christmas present. That was really very, very thoughtful of you and that was a life experience that I took forward. It's like, you know, probably the last time, that last time you want to fire somebody, unless it's something really urgent, don't do it just before the holidays. I mean it really ruins, it really ruined the holidays. For me it's like trying to do a job search in the winter is bad enough, but you know, when you're wondering about gee, where's my next paychecks going to come from and what's Christmas going to look like, you know that was kind of a bummer and a damper.
Speaker 2:Fortunately I did land another position relatively quickly and that was as a controller of a Japanese manufacturing company. Of all things. I had the manufacturing experience, I had the accounting experience, I had the ERP experience and I also happened at one point to have lived in Japan and I spoke the language reasonably well. And so the company hired me and said you know, we want you to be our controller. And that was the first company that I've scaled from by adding a zero to revenue. So when I got there, we were a $5 million company. Three years later we were a $50 million revenue company and I was the one responsible for designing and implementing and running all of the finance and the accounting functions. And I was told that the three people I had at 5 million were the three people that I had to have at 50 million. In other words, I had to automate everything so well that I didn't have to increase my headcount, and we did. I used state-of-the-art technology and process design. From the beginning. It was a greenfield implementation because we moved from one location to the other. I had full control over all of the accounting and finance software and what we were going to use, and so I designed it to be as automated as possible and in the end, I essentially designed myself out of a job.
Speaker 2:I was bored. Frankly. There was really not much for me to do. Even the financial statements pretty much prepared themselves. The only thing I was really useful for was the budget. And the budget was really kind of set from on high and said here's what your budget is. Make it happen. And so I looked at that and I said you know, I maxed out in manufacturing. I kind of maxed out on the IT world. I'm certainly maxed out on the accounting side of things. You know, those guys over in finance seem to be having a lot more funding than the accounting types.
Speaker 2:And that's when I started really taking a close look at finance and so I essentially quit my job, rented out my house and I went over to the University of St Andrews in Scotland. I figured you know, one train stopped down from the guy that invented economics was Adam Smith, and University of St Andrews was known for teaching some royalty person or other. Maybe you've heard of him, some prince. So I thought it was probably a pretty good school and they had a great postgraduate program in finance. And I said you know what I want to get out of the US? I didn't have anything really to tie me. I went over there and got my postgraduate in finance. When I came back, that's when I started working as a just a fully fractional person, right Teamed up with another person and so kind of fast forwarding. That's where the you know the, the fractional CFO work came in. And then you know the story about the SASS.
Speaker 2:Throughout that entire career I never stopped being a doctor. I always go for what's the real problem here? Can we cure the real problem without treating the symptom? Don't just slap a solution on, don't just throw bodies at it. Figure out a way to actually get to the root cause of the issue so that it's fixed once and forever. Forward.
Speaker 2:The Japanese, working with them, taught me an extremely valuable lesson on top of that, which is it's not customer satisfaction that you're going for, it's customer delight. A customer that's merely satisfied with you may or may not refer you to somebody else, may or may not evangelize about your services or your product, but a customer that's delighted by what you do, they're going to tell others because they're going to say, hey, these people really know what they're doing. They go above and beyond. And so those two core kind of methods of thinking always go for the root cause, find a way to make it scalable and then really delight your customers. Go above and beyond, you know, in all steps and try and make sure that they're really happy with you. That, to me, is what I attribute my personal and my company's success to, because I, you know, instill that into all the people that work for me as well is we're not merely here to just meet the customer's expectations. We're here to figure out and answer their questions before they even ask them.
Speaker 1:Yeah, what an amazing story. There's so much to break down there and I've just got so many questions based on that. But I definitely sense you know a problem solving element to your nature and I love that you say like, treat the root cause, don't just slap on more technology and systems to fix the problem. You know, definitely look at the foundations. I suppose, coming back to your experience, maybe in the company in Japan where you scaled it so much, what do you think were some of the key principles that helped you scale that?
Speaker 2:So one of the key principles is you know, what the Japanese teach you is that the person who owns the product and when I say product, I mean that very liberally. A product can be a cell phone like this. A product can also be an invoice, it can be a transaction in the system, it can be a data element the person or entity that first creates that is the one who has the most control over the quality, is the one who has the most control over its quality. And so you've probably heard the stories about Japanese manufacturing companies where the person on the line can stop the entire production line if something's not going right. They absolutely can, and what they want to do is they want to be able to create quality from the beginning. Data is no different than a physical product, and data in all of its forms is subject to those same quality rules. You want to make sure it's right the first time and every time after that, and you want to have a single source of data that's your source of truth.
Speaker 2:So, when it comes to systems design, let's say you're scaling your company, you've got a SaaS company and you're at a million dollars of ARR and you know you're going to be hitting 10 million within the next two or three years and possibly 100 million thereafter that, or maybe it's only 20 or 30. But what you've done is you've taken what I call a $1 million company and you've added a zero to it. That means you're probably adding a zero to all the transactions that are going through your system. Is your system set up to handle that extra zero? Are you designing from the beginning the things that you're going to need as a fast CEO the numbers that you're going to need, the forecasts that you're going to need, the metrics that you're going to need?
Speaker 2:Are you designing your systems today so that it's easy for you to extract and get that information? Because the last thing you want to be doing is standing in front of an investor, your board of directors, and not knowing that the numbers that you're giving them are absolutely correct. And so that constant gearing towards quality assurance, making sure that the reports that we're producing, make sure that the invoices we're producing no matter what it is that we in the finance and accounting world are producing and we are producers is accurate from the beginning, so that you don't have to go back and redo anything. There's no guesswork. The numbers are right because you've made them right from the beginning.
Speaker 1:Any more principles?
Speaker 2:Delight your customer. Solve the problem from the beginning. Design for scale from the beginning. Customer solve the problem from the beginning. Design for scale from the beginning. You know, those are kind of the touchstones for us, really. And in the end, keep in mind that, whether we, you know, accept the fact that AI is going to take over our lives or not, it's all people. Software companies are primarily people. If you take a look at how much of a cost of a software company is devoted to people, it's anywhere from 60 to 80% of their costs are related to the people.
Speaker 2:Are you treating your people well? Happy workers produce and are productive way more than ones that are unhappy. If you're running roughshod over your team, if you're driving and grinding them into the ground with deadlines, you're probably not getting their best work. A, because they're too tired. B, they think that you don't care about them. And C, they're looking for their next job because they're tired of working like that. Those are not the elements for your own success as a CEO of the company, for your culture.
Speaker 2:So when we take a look at the operations side of things, when we come and look at it, we pay heavy and close attention to the people side. Do they have a competitive benefit package? Are they being treated well? Do they have regular performance evaluations that are positive? Are they being held to performance standards that make sense, that they're achievable? You know the whole part of HR that you wouldn't normally think like a CFO would think about. Well, that goes back to my medical training. I was there to treat people. Now I treat companies, but they're also made up of people, so it's really easy for me to translate these skills into what we do.
Speaker 1:I couldn't agree more with that. I think people are the backbone of the company and you know, you hear people like Steve Jobs and many others basically give credit to the people in the company. It's not just them and their vision, it's the people that have been inspired and you know to put in the hard work to get them there. You've worked now with quite a lot of SaaS companies. What do you see as some of the biggest financial pitfalls that they make and they face?
Speaker 2:So it depends on whether they're venture backed or they're bootstrapped. We have clients that are on both sides of that world. So let's talk about the venture capital backed companies first, or angel I just say venture back Usually those kind of companies. There is a CEO or a founder that has developed a product, a solution, in search of a market. On the bootstrap, what tends to happen is we have an industry insider who knows the industry inside and out, see the problem and hire somebody to develop the solution for them and then goes to market with it. Why are those distinctions important? Because in a venture-backed company, their biggest struggle, their biggest financial struggle whatever you want to call it is the go-to-market strategy. The GTM is want to call it is the go-to-market strategy. The GTM is what we call it being able to identify that ideal client profile, being able to figure out what messaging will reach them, what messaging will get them to respond, what will cause inbound traffic to you, and then being able to convert that inbound traffic into sales. That is by far the biggest challenge that we see in our client base is decoding. The GTM is what we call it. The ones that figure that out, they get to their B round and they're off and running the ones that don't figure that out. They may or may not make it to their A round, but after that, if they haven't figured it out, they're not going to make it to the B route.
Speaker 2:On the bootstrap side, these are the folks that have already worked that out. They're industry insiders. They know how to get to the market. They know what their ICP is. They know where the watering holes are, if you will, where everybody goes to get their information. They know the pain points. They can speak the pain points because they're industry insiders. They know the pain points. They can speak the pain points because they're industry insiders. So it's a lot easier for them to figure out financial success because they already know there's a need for this product and I know how to sell it and who to sell it to, and so they're able to get revenue from the beginning.
Speaker 2:Their biggest challenge really is working capital management. What do we do with that extra cash? Because the bootstrappers they're not necessarily interested in taking in outside investment and diluting their equity position. So they may look for venture debt, they may look for traditional debt, they may look for just pure bootstrap. I'm going to put it on my back and the cash flow to get off my company. So those are two very different challenges. And in the bootstrap world they tend to weed themselves out early, because if you're trying to do this off the back of your own revenue and maybe some money that you put into it, if you don't succeed, you're going to fail early engagement.
Speaker 2:What we're really doing is A cleaning them up so that they look like a SaaS company, so that all their metrics are there, so that they can actually properly benchmark themselves and measure themselves as a SaaS company. But, just as important, we're working on that cash forecast, because in the end, I probably spend 80% to 90% of my contact hours working with clients on forecasting their cash, because you can't spend that income, that's book. You can only spend the cash that's in your bank account. And those are two very different things in the SaaS world, especially because in the SaaS world, if you're getting prepayments up front for your annual subscription, you can spend that money now, but you still have an obligation to deliver your product for the next 12 months. So it's not just a hey, I can spend it and go. You know, I got the money, I can go spend it. You can, but you also have to be cognizant of the fact that you still have to deliver that product for the next 12 months. Do you have the wherewithal to do that?
Speaker 1:Yeah, having experienced both of those different companies Bootstrap versus VentureVac which ones do you think succeed has the highest success rate, say, like five years from now?
Speaker 2:The Bootstrappers.
Speaker 1:Right because of the industry experience.
Speaker 2:They've already succeeded when they come to engage with us.
Speaker 2:They're already to the point where, look, we're large enough. We really need to make sure that we've got our SaaS metrics, because they may be looking for an exit. We really need to make sure that we've got our SaaS metrics because they may be looking for an exit or they may be considering their first round of investment and they know that they haven't really set up the back office and the finance function for them to be a truly a SaaS company in that perspective. So they're coming in to us to say, hey, I need my chart of accounts set up, I need my financial reports set up, I need my KPIs set up, I need a forecast that I can show investors what I'm going to do if I get my $5 million. All of that has to come together, plus this thing that we call the data ball, the virtual data room, which is getting all the documents and everything in the files that you're going to need to show the investors that you actually have real contracts and real customers and that the IP is protected and all these other things. So the bootstrappers are the ones that tend to stay with us the longest because they're growing slowly and steadily and their cash flow positive, the VC-backed companies.
Speaker 2:The biggest problem there is what's called the runway the cash runway. So the cash forecast is just as important, but for a different reason. The reason for a venture capital cash forecast is we need to be able to tell you you're going to run out of cash in 18 months. That means you're going for your next raise in 12, because it usually takes about six months to close around. You should give yourself at least that much time. And oh, by the way, don't try and raise money during the fourth quarter because everybody's on holiday. I'm serious If you don't have your term sheet by Halloween, you're not going to get a term sheet.
Speaker 2:Maybe you'll get lucky, but usually because it's an insider round or something like that.
Speaker 1:And that makes a lot of sense.
Speaker 2:And so, having worked in a few different industries, how do you think the SaaS world is different when it comes to financial strategy? You know, I think it is and it isn't. I think the only thing that makes SaaS different is the prepayment of the annual contract. A lot of cases you can, you know you sell your product, it goes out the door, you get your money, or you're selling a service or whatever. So in this regard it's a little bit unique in that you're getting paid up front for your services. There aren't that many industries where they pay you up front for that.
Speaker 2:Usually it's like you know, like for me, for example, when I'm done, I send them an invoice and they pay me. Well, that's called inter-arriers billing. You know I'm not asking for them for money up front. I don't work on a retainer basis. We work on purely an hourly basis because we find that's most efficient for our client. So in the case of a yoga studio or maybe a membership type of organization, maybe you get monthly payments, but in the end it all comes down to cash management. That is by far the one lesson that the ones that figure it out earliest are the ones that are most likely to succeed. If you don't know how to forecast and manage your cash. You're not going to survive because you can't spend what isn't in your bank account.
Speaker 1:And so a lot of SaaS companies. Just on that, actually, you know, when I bought or purchased software, some of them don't give you that monthly option. You either have to pay for the whole year upfront and you know that time kind of turns me off a little bit. There's been a lot of software where I've seen that and I've gone oh no, I really need that trial first. What's your thoughts on that? Should SaaS companies offer the monthly option or should they go for the upfront annual option?
Speaker 2:Your quality of earnings are going to get downgraded if you are not a annual prepayment. So it comes back to kind of exit strategy and investor strategy in terms of if you're going to go out and raise money, yes, there's the convenience for your customers of making it monthly. That's great, but that means they can drop at any time, whereas if I'm receiving the entire payment up front for a year, they only get to drop in a year. So because I've already received that, so that annualized prepaid contract has kind of become the gold standard for SaaS companies in terms of what you should be getting and asking for from your clients. Now, market conditions are always going to trump that, which means that if the market just doesn't bear that, they're just not going to prepay annually and it has to be monthly.
Speaker 2:We see this a lot, for example, in the healthcare industry. They're just absolutely afraid of commitment. These people have total phobia of commitment. No, I only want a month-to-month, or we can't do business with you. Well then, maybe we go month-to-month, but when an investor comes in and they take a look at your revenue streams and they're going to do what's called a quality of earnings analysis, they're going to rate the annual prepaid contracts more highly from a valuation perspective, as long as you have good churn contraction numbers, right? You don't have like crazy churn and contraction numbers. As long as you have good churn and contraction numbers and you have annual contracts, you're going to get a higher valuation for your pre-money value your pre-money of your investment as well as your exit than you will for a monthly. It's just that kind of math and that's being driven by the investor side of things, not necessarily by, obviously, the consumer side of things.
Speaker 2:Yes, sure, I want to pay my Netflix every month. I don't want to prepay it for a year because maybe I'm going to decide I'm going to go move to Disney plus, right, I want the freedom to vote with my feet, whereas with certain other software, you know, I have to pay annually upfront, like you. There are, there are soft, there are, there are platforms that I have to have in my company and some of them only offer an annual contract. Well, I grind my teeth and I pay it and I hope that I like it a year from now. So that's kind of an oversimplification, but that's the main reason why you would see primarily an annual contract versus a monthly option, and in some cases they'll offer you a discount for that annual contract.
Speaker 2:They'll say hey, you're $12.99 a month if you want the monthly contract, but it's $120 for the year. They make it enticing for you to take that annual contract.
Speaker 1:Yeah, that makes sense for sure. Coming back to cash flow, managing cash flow what are some of the biggest misconceptions that you see and some of the biggest issues that you see when it comes to SaaS companies?
Speaker 2:I think the I wouldn't say there's a misconception, so much as there's a lack of preparedness.
Speaker 2:You know, in the beginning, when it's just you or one other person, you can manage your cash flow by what I call the MBA method, the management by bank account method.
Speaker 2:Cash flow by what I call the MBA method, the management by bank account method, which is I can do this by just looking at my bank balances and understand, because the transactions are slow enough. I know what's going on. I know where my next paycheck is going to come from or my next investment round is or not. It's pretty easy to get into the thought pattern that I can manage my cash by watching my bank account because we're small. But then you start to grow and then you start to add things. Suddenly your transaction flow starts to get bigger and bigger. If you don't build a system that allows you to capture that information and project it forward, you run the risk of running out of cash without knowing it. Word you run the risk of running out of cash without knowing it, or it comes up upon you. It comes up on you too fast for you to be able to react to. It is probably the better way of saying that we all know when we're going to run out of cash. It's usually like do I know that I'm going to run out of cash in 30 days or 365 days. I'd rather know 365 days in advance that I'm going to run out of cash, because I have a whole year to plan for it. 30 days doesn't give you a lot of the wiggle room. So that's why the first thing when we come in, a lot of our clients are saying I don't know where my cash is going. I got this investment round. Our burn is out of control. I don't know why. That is solvable. That's an absolutely solvable problem.
Speaker 2:It just takes the discipline of setting up your back office systems in order to produce that information and have somebody like myself or my team helping you with it, to say okay, you're assuming this about sales. You're assuming this about your prepayments. You're assuming this about your organization in terms of who you're going to hire and when, and what their salary is going to be. When and what their salary is going to be. This is what you're going to need for your tech stack. This is what you're going to need for your operating expenses. Here's how much travel you're going to boil all that into a financial model so that it fits out. Here's where my bank balance is going to be each month for the next 12 to 15 to 18 months. That's our mission. When we come into a client, the first thing we're looking for is cash behavior and how can we forecast it? Because we know that that's like I said. I spend 80% of my time with my client talking about their cash flow.
Speaker 1:And so my next question is actually a bit of a selfish, personal one. I have a cash flow currently on a spreadsheet. Is that okay, or is there a better way to be looking at this?
Speaker 2:I have not had, I have not seen a financial forecasting tool platform out there yet. That does it better than we do it on a spreadsheet.
Speaker 1:Any founders are listening right now, go and invent one.
Speaker 2:Go for it. The problem is that everybody is just that unique. We have a standard workbook that we use for all of our clients. We have a standard chart of accounts. We have a standard workbook. It's all basically the same thing. That makes it easy for our team to go in and move from client to client. Right, that's also SAS specific. But each one is just a little bit different and everybody wants just a little bit extra reporting or maybe a little bit different reporting or a different time frame. So it's very easy for us to customize a G-sheet than it is to say, you know, a purpose-built software where you're stuck with what they do and how they do it. So that's number one is you're taking them. Maybe it'll work for you.
Speaker 2:But when it comes to the variance analysis and this is the part where I think people miss they miss the point. It's not that you're going to forecast and you can find a forecasting tool, but you need to be able to find out why your forecast was wrong, because it will be right. I mean, it's a forecast that, by definition, it's not going to be right. There's going to be something in reality that happens. That's not different. That's not the way you thought it was going to be. That variance analysis on a cash flow basis and on the profit and loss statement basis is a critical function that January versus what we said was going to happen, because we need to know exactly where those differences are so that we can adjust our forecast to make it more accurate. That ability to go back in and understand you know what? We forecasted our hosting cost to be X. It actually ended up being X plus Y. Oh, what happened? Oh, we had an extra instance that we had to enable or whatever it was, but that gives you the visibility to say our payroll was off, our operating expenses for cost of sales were off, whatever it was that was off.
Speaker 2:You're able to go in and in detail using a spreadsheet method. You can tell exactly what's off because you know you have all the transactions in the accounting system and you have basically the same set of transactions built into your financial model. And so I can guarantee my client that if you miss cash, I guarantee you I will tell you why. There's no guesswork. I don't have to go into some forecasting tool and try and figure out how calculated. I know exactly how we calculate. So I have yet to see us a platform out there that can do it better than we can do it on a spreadsheet. Sorry, all you AI guys out there that are designing your software.
Speaker 2:Good luck, because what you're trying to do is replace what's between my ears.
Speaker 2:And I have 30 years of experience in doing this. Now maybe you can, but so far I haven't seen it. So that's one is that it's a lot easier for us to bespoke a forecast if we're using a spreadsheet. The second thing is that this gets a little bit into the weeds.
Speaker 2:Most of the forecasting tools out there forecast cash as what we call a plug. So they figure out the rest of the balance sheet and then what's left over must go into cash. That is probably sorry for all you CPA types out there the lamest way of doing a cash forecast I can think of. It's easy to forecast a balance sheet and then plug cash. The problem is try to explain a CEO that the reason why their cash is short is because their accounts receivable is too large. They're like well, what do you mean? Well, you're taking up cash in your accounts. That doesn't make sense to me. I spent way more time trying to explain that indirect method than it is to say. We forecasted payroll benefits to be $125,000 last month. It was $135,000. Oh, you paid a $2,000 bonus one time to one of your employees.
Speaker 2:That's why it's off. Oh, okay, I get that. So the direct method of predicting cash or forecasting cash is not something that I see in most of the platforms out there. It's the indirect method, where they're forecasting the cash at the plug after they forecasted everything else. That doesn't work for us. It doesn't work for my clients.
Speaker 1:No, and I think something else I've seen as well is you know, they're looking at months ahead and they're like we're about to get some good money in. Let's start spending it now rather than wait for it to hit the bank. And then it's not always due to hit the bank which is an issue.
Speaker 2:Do not spend if come.
Speaker 1:Yeah.
Speaker 2:Okay, that's called if come. If it comes, yeah, if it doesn't come, you're kind of screwed, aren't you Right? You know that's probably another mistake that I see, because you said what are some of the financial mistakes that I see. That brings to mind one that I see a lot on the VC side is staffing up before the business is there. Oh, I have $5 million, that's going to last me a long time. Well, if you go out and hire 10 new people, that's not going to last you that long. And if you're hiring 10 people and you don't have the contracts coming in to cover some of that with your inbound cashflow from your customers, contracts coming in to cover some of that with your inbound cashflow from your customers your runway is going to be short.
Speaker 2:Yeah, I see too many times where clients get into trouble because they really beef up on the org and staffing before they really have the business to support that and they're like, well, but I got to get these people in now. It's like, well, slow down. And they're like, well, but I got to get these people in now, like, well, slow down. Do you really have to? In my business, for example, as a service provider, I absolutely can't do that. My working capital margins are fairly narrow. Right, I need to be able to staff up as the business shows up. I can't staff up before the business shows up. Then those people are sitting there with nothing to do and I have to pay them. I don't have a VC angel to throw money at right, I have a company to run so I go back to. Is there really a fundamental difference in finance between SaaS and the rest of the world? Not really. It all comes down to cash management.
Speaker 1:Yeah, I think that is a big problem. Do we get the people now and hopefully get all these contracts coming in, or do we wait for the contracts to come in and maybe have that painful period where we're just working extra hours in the day until we do stuff up? And I think that's where the mistake there as well is. That, I see, is when they wait and then they're desperate for people, they end up hiring too quickly and maybe hiring the wrong people. But founder's dilemma, I suppose.
Speaker 2:It's a founder's dilemma for sure, I mean because you really want to take your time to make sure you're hiring the right people.
Speaker 2:You don't want to be rushing into it, but I'm going to err on the side of saying hold off on your staffing until you have the business. And I have a client right now. This is his second time through. He had a very successful exit earlier. He's used that money to start up another company. He is the one that is telling me I'm not going to hire this person. We don't have the business yet.
Speaker 1:Yeah.
Speaker 2:And I'm like you learned.
Speaker 1:It's not that experience.
Speaker 2:You learned.
Speaker 2:Coming back to cash flow and really financial metrics what should SaaS founders be looking at in terms of metrics that can be quite crucial for long term success that maybe they're overlooking. So it depends to some extent on what stage your company's in. Okay, when you're just starting out in your pre revenue, you're not going to be focused on that dollar retention. You're not going to be focused on CAC cost to acquire customer. You're going to be focused on two things cash runway and sales growth the two biggest metrics. Right, as you get bigger, you are going to start and as as you have more history, you're going to want to start to track other things. We have five metrics that I call the big five for us as a company, as a firm delivering services to SaaS companies. Number one is your ARR. Absolutely, that's the biggest driver of your evaluation. Having an accurate ARR is not something that you just whip up on the back of a spreadsheet. Okay. The next thing after that is gross margin. Software companies are heavily evaluated on their gross margin. That's not going to really come into play until you reach a certain sales volume and you have that cost of goods sold, that hosting cost, that customer success cost, that implementation cost. You've got that kind of figured out. So that's probably a couple of years in, but that's a big one is your gross margin. So that's number two. Number three is that cost to acquire a customer. Okay, what does it cost for you? How many dollars are you spending to get a new dollar of ARR? If it's one-to-one, that's pretty good. If it's 50 cents to one, that's great. If it's $3 to one, you have a problem, right? So what you want to be looking at is early on, is when we actually have a sales team. That's not the CEO, right, because a lot of times the CEO starts off as the lead salesperson, right. Of course they're the ones that know the product, they know the industry, they're the cheap cook and bottle watcher, right. At some point they need to take that part of their brain and give it to somebody else to do when you have an actual sales function. That's when you need to start tracking CAC, the cost to acquire a customer. So that's number three.
Speaker 2:Number four is your net dollar retention. I cannot stress how important it is to track that. That is to say, if I have 100 customers at the beginning of the year, what happened to those 100 customers 12 months later? Did they churn, did they expand, did they contract. How do I measure that? And am I above 100%? Because ideally you want to be at least at 105%, or 110 is considered best in class and above that, people should be bowing down to you and asking you for lessons on how you do net dollar retention.
Speaker 2:But that is a critical metric that I think too many clients do not pay attention to until we really rub their nose and say, no, we're going to make you look at this one, and the reason is the investors are going to look at that because that's a huge input to your quality of earnings is your net dollar retention. It's not just your ARR growth. You could be growing really strong on ARR, but you're losing hundreds of customers out the back door. So that probably tells me your CAC is messed up, which means you're spending too much money to acquire your customers because you're losing too many out the back end. So you don't want that to happen. And the last big metric, of course, is that cash runway, that cash forecast Metric, of course, is that cash runway, that cash forecast.
Speaker 2:So your ARR, your gross margin, your net dollar retention, your cost to acquire customers and your cash forecast those are the five. If you get those right. The rest of them are probably going to take care of themselves. But those are the ones that in the early stages. Those are the ones that we bring in. Now there are others, there are all sorts of others. You can go out there and you can find 35 Thas metrics if you want. Okay, when you're a $10 million, $20 million, $30 million company and you have department heads that are running all sorts of things, that's the time when you start really blowing out the metrics because they need their own specific metrics for their departments. But when you're in the early stages, you focus on those five and get those five right you're going to be fine.
Speaker 1:Yeah, I'm glad you mentioned that, robin. Your attention. I was recently speaking to a customer success expert and I'm probably going to butcher this quote, but she said something along the lines of increasing that by 3% can actually double a company's valuation, which I thought was pretty awesome.
Speaker 2:Yes.
Speaker 1:You mentioned the CEO, obviously having to do a lot of sales, probably wearing a lot of hats in the early days. I'm more interested in the CFO. I feel like you've redefined that role in the world of SaaS. So the modern SaaS CFO, beyond numbers, what else do they need to focus on?
Speaker 2:Everything.
Speaker 2:The whole business, the whole business. It's a holistic approach. There isn't an activity or a decision that happens within the four walls of a company that doesn't eventually end up in a financial result your hiring practices, those affect your turnover, your customer success practices, those affect your net dollar retention, your engineering practices that affects your downtime and the quality of your product. There isn't a single thing that happens inside of the company that doesn't have a financial impact. I challenge anybody who's listening to give me an example of a decision you make inside of your company that I can't translate into a dollar result, because there isn't. So that said, the modern CFO in my mind is we're a cashflow Oracle. Okay, we're the chief financial officer, but we're mostly the cashflow Oracle. We cannot forecast cash unless we know really pretty much as much as the CEO about everything that's going on in the company. The CEO provides the strategy, they're the leader, they're the ones that have the vision of where the product should go and what the customers really want. The CFO's role is really as a strategic enabler. We're the ones that are there to make sure that they have all the numbers and resources to their fingertips that they need to make that vision and to make that vision reality.
Speaker 2:So in my mind, and maybe it comes back from the fact that I was originally trained as a physician, which is, I'm looking at the entire body when, when I have a pain so, for example, a chest pain right, am I having a heart attack? No, I could have indigestion. I could have a pulled muscle. There could be all sorts of reasons why my chest hurts, right, but it's within my own body, and so I need to know oh, you know what I worked out really hard two days ago. That's probably why my chest hurts. Okay, it's like you have to understand what's going on.
Speaker 2:I'm oversimplifying it, but you need to know what's going on pretty much in every aspect of the company, or at least familiar with it. You don't have to be an expert in it, but you need to be really familiar with it and how it impacts the bottom line. That's the part that I think you know. If anybody's out there listening, who's a CFO who's trying to do this, it really is. You are not inside of a silo and you're just looking at the back office you really need to be looking at. Do we have the proper levels of insurance? Is our cybersecurity profile correct to protect them? Do we have HR policies that keep us from being sued for sexual harassment? I mean, you can go on down the entire list of things that can go wrong in a company. Is somebody paying attention to those? Is somebody addressing them?
Speaker 1:Because all of those cost money. I mean the cost of cybersecurity, the cost of HR issues. It all comes back to finance at the end of the day.
Speaker 2:I call those extinction-level events. You want to protect yourself against an extinction-level event. A cybersecurity breach can bring your entire company down. A sexual harassment lawsuit can bring your entire company down. Okay, it doesn't matter. There can be all sorts of these things. You want to make sure that those particular types of events are protected against. And it's pretty easy to do that stuff. That's the thing it's like. It's pretty easy to do that stuff. That's the thing it's like. It's not rocket science, it just takes an holistic approach to it. And you know what I call the global view, 360 degree view. I know everything that's going on inside of my client's company as best I can, because that's the only way I can be most effective as their CFO and say hey, I keep hearing on the grapevine that this salesperson is like mistreating his employees. Are you aware of that? Have you heard that? What are you doing to correct that? Because if you have a leader that's mistreating employees I go back to the employees are probably not happy and they're not doing their best.
Speaker 2:That also opens up your company to a lawsuit. They could be creating a hostile workplace. Hostile workplace lawsuits in the United States are pretty common. Hey, these people are harassing me because they're putting girl pictures on the wall, or whatever it is. So in the end, these are the kinds of things that a good CFO is going to at least alert the CEO to. To say I think you have a problem here that you should take a look at, because if you don't, we could get sued. We could lose money. We could lose a key employee. Right, that person walks out the door with all that tribal knowledge that they have of the company you now have to replace that. That's costly company.
Speaker 1:You now have to replace that. That's costly, and so, with that in mind, what kind of buffer or money should a company have set aside for these kind of rainy day type situations that you just can't predict, such as lawsuits such as you know, maybe we lose an employee, maybe we suddenly lose a big client, those kind of issues.
Speaker 2:I honestly wouldn't go at it from that perspective. I would go at it. To me, that's what's called a corrective action. I'm correcting after the fact that something's happened. So I'm setting aside a rainy day fund. What I'd rather you do is prevent it from happening in the first place. There's a thing called the hierarchy of control preventive versus detective, versus corrective um and this goes back to the japanese. I think it even goes back to deming, who is the ultimate, you know, guru, when it comes to quality um. That's a fascinating person to study, by the way edwards stemming um.
Speaker 2:So in the world of quality control, what you want to do is you want to prevent the fault from happening in the first place. Morita, who is the founder of Sony, was famous, and I'm going to butcher this quote as well. He was asking his people what's our parts per million rate? Well, it's down to three. He said, yeah, but it's 100% from the three people that get the faulty product right. He was the one who you want zero defects.
Speaker 2:Again, you're trying to prevent the defect from happening in the first place. You're trying to prevent somebody from creating a hostile workplace. You're trying to prevent the cybersecurity breach from happening in the first place. Setting aside money to buffer against a problem that could happen later from a working capital perspective, is basically wasted money. You're setting money aside that's not being used to grow the business. I'm setting aside this money because I'm protecting myself against an event.
Speaker 2:No, you should be looking at how you prevent that event from happening in the first place, so you don't have to worry about having a buffer for it. Event from happening in the first place, so you don't have to worry about having a buffer for it. Those are the kinds of that's the thinking that I bring in, which is no, how do you prevent that thing from happening in the first place? That's your best lever, and then maybe you have to put some detective controls in afterwards to detect if a quality failure has occurred. But the last thing you want is to correct. It means that the the fault has already escaped your company. The defective product is already out there and now you're going to pay three to four times what it costs to produce that thing, to fix it that's such a different way of looking at it, I think, because a lot of people would be like we need to set money aside.
Speaker 1:But what you're saying, it makes total sense. You know know. Reinvest it instead, put it into anything that's going to help grow it or like, move the company forward, and, of course, all the prevention methods as well. But SaaS founders may be preparing for the next fundraising round. What's one piece of advice, financial advice, that you would give to them?
Speaker 2:You know I go back to some of the what we call basic blocking and tackling. Assuming that you have product market fit and assuming that you've got the growth metrics and you know that you're investable. Don't let the back office be the reason why you don't get invested. Have your data room set up. Make sure all of your contracts are in order. Make sure you have a solid financial forecast that you can put in front of people. Make sure that all of your accounting and financial information is exactly correct and that nobody's left to guess. We're not sure if your gross margin is correct. It looks like you're putting stuff in there that you're not putting stuff in there that you should. Right. That goes back to the. Make sure that you have the back office locked down so that the finance piece of this doesn't become the reason why you don't get invested. That's the easy part, because it's easy to do that. It's straightforward. I should say Structure your contracts. You get everything in a data room. You just hand them the keys and they can take a look at it. How you put your pitch deck together, how you get your, you know how you get your messaging across. That's an art, right? That's something that you know it's trial and error and there are some best practices out there and there's lots of suggestions. But in the end, if you feel you're investable and you are right, so you're going to go out, you're going to go to market, make sure that you've got all your i's crossed and your t's dotted or maybe I got that backward your t's crossed and your i's dotted, so that you've got you know everything in order.
Speaker 2:Um, that's where people like me come in. You know we're the we're the data vault guards, we're the, the, we're the cerberus in front of the guards of the gate to say, okay, you, you can't pass here, this is the protected area. But we make sure that the protected area is set up correct. I can't tell you how many times due diligence has slowed down a deal. That's why, when we first come in, the first thing we're doing is we're setting up the due diligence rooms, because we know we're going to need it sooner or later. We need it to run the company Number one. You need this stuff to run the company. Later, we need it to run the company Number one. You need this stuff to run the company. I want to know where all my employment contracts are and make sure that they're in order. But, more important, you're going to need to show that to the outside investors so that they believe that you're telling them the truth.
Speaker 1:That's really good advice, Thank you. My last question to you today is one that I ask every guest on the show is if you could go back in time. What is one thing that you might change, whether that be in SaaS, gurus or maybe previous businesses? What comes to mind?
Speaker 2:Not a thing, and you know why I own my mistakes. I can go back and second guess every wrong decision I've ever made in my life and it would be great if I could go back and, you know, maybe finish becoming a doctor. But I don't know, maybe if I finished becoming a doctor I would have been a suicide candidate because it would have driven me, you know, into deep depression, I don't know Right. So it's like when I cause, you're not the first person to ask that, like what would you go back and tell your 25 year old self? I wouldn't tell them anything because I would want them to become where I am today All the scar tissue, all the mistakes, all the learnings, all the history that I have. I like where I am in my life right now. I really wouldn't change a whole lot. I'm very fortunate in that regard that I'm able to do what I'm doing and I'm able to be healthy and I'm able to have a great family and all the other things that go along with it. So for me it's like own your mistakes, learn from them. Okay, your mistakes are your, are treasures. Okay, yeah, that hurts like hell when they happen and embarrassing and humiliating or whatever the negative emotion is. But get past that and look back on it and say you know what emotion is. But get past that and look back on it and say you know what?
Speaker 2:Every time I lose a client, I go into a deep dive and say, okay, what could I have done better? What did I miss? What signal did I not see? What delivery did we not do? Because we do lose clients. We're not perfect, you know it happens. But I always go into a deep analysis and say where did we screw up? Did we screw up by hiring them and by letting them hire us in the first place, like it wasn't a good fit for us? Maybe that was the screw up, or we weren't responsive enough to a grumpy old investor who was just like I want to know this and this and we were ignoring it. Whatever it happens to be. But the treasure of my mind isn't in the things that I did right. It's in all the stuff and what I learned from them To me. That's why I wouldn't go back and tell myself to do anything differently.
Speaker 1:I absolutely love that. I absolutely love that. It's take ownership, basically, and, you know, stop pointing fingers everywhere else, which is very easy to do, and I think it's people's default. So amen to that. Anthony, thank you so much for being on the show. I think we've got some really good advice here from a finance perspective. I hope all the founders listening are opening up the cashflow spreadsheets this very minute and thinking about how they can make some changes. So thank you so much for all the insights.
Speaker 2:Thank you for letting me on your program.
