Defining “Excellence” for the SaaS CFO

By Eric Mersch

My 20+ years as a SaaS CFO has refined my perspective about what defines “excellence” when it comes to performance in the C-suite. I believe a great CFO needs to embody three key traits:

• Leadership
• A strategic mindset
• Diverse business and financial experience

IMHO, these are the table stakes for any successful CFO. But in my experience working with Software-as-a-Service (SaaS) companies, I find that there are five additional commonalities that define successful SaaS CFOs:

1. Standardizing SaaS Performance Metrics
2. Deep Business Intelligence
3. Strong Cash Flow Management
4. Superior Fundraising Skills
5. An Aptitude for Talent Acquisition and Management

#1: SaaS Performance Metric Standardization 

Accountants rely on Generally Accepted Accounting Principles or GAAP to ensure that financial reporting is transparent and consistent from one organization to another. But in the Software-as-a-Service business, we don’t have a similar set of commonly accepted and used principles for our SaaS metrics. Definitions and application of these in fact, vary widely across SaaS businesses depending on both the type of business and the experience of company stakeholders.

Unfortunately, the use of different methodologies for calculating SaaS metrics inhibits strategic collaboration across SaaS business teams and often leads to lack of trust among stakeholders. Business operations can suffer because the performance metrics used by different teams are calculated differently, leading to incorrect and inefficient decision making. Potential investors may not understand the true extent of value creation if the metrics used by a company team vary from industry norms and this can constrain fundraising opportunities.

The successful SaaS CFO must gain consensus within the C-suite, company team and even at the board level around a common and consistent lexicon of performance metrics. This initiative on the CFO’s part, requires a significant amount of education/teaching, mentoring, and sometimes, cajoling across the enterprise to ensure transparency and consistency. Success in this endeavor, for any SaaS CFO, requires both leadership and experience.

I have compiled and published an online glossary of SaaS Metrics, Benchmarks and Ratios with my recommended definitions and always use this as a starting point for the metrics discussion at any company. One of the first steps in my client engagements is to make sure to gain consensus on the definition and application of SaaS metrics at the start, thereby ensuring transparency and consistency in subsequent financial reporting.

#2: Deep Business Intelligence

The proliferation of technology within today’s businesses and the ability to understand customer behavior inherent with the SaaS model, produces more data about SaaS enterprises today than at any other time in history. The CFO sits at the intersection of a company’s data flows and thus is best positioned to extract and interpret this data, connect operational metrics to the company’s financial performance, and translate the results in a way that is both digestible and understood by all stakeholders.

The successful SaaS CFO must master these three steps to support collaboration among the management team thereby optimizing decision making and leading to the most efficient business performance.

#3: Strong Cash Flow Management

I cannot stress this point enough: Great CFOs always need to know the company’s cash position at any given point in time and understand how cash flows move in response to business performance. But SaaS companies, in particular, have a unique cash flow issue since they need to decide whether to charge an annual versus a monthly subscription fee.

This decision greatly impacts cash flow. Charging an annual upfront fee is great when a business is growing because working capital increases proportionally with the growth in revenue. And charging a monthly subscription fee can be a challenging strategy for high growth companies whose cash needs increase with higher growth. But CFOs using annual fees must be careful in a downturn because revenue declines can quickly deplete working capital reserves.

Strong SaaS CFOs know that both annual or monthly fees are valid approaches and need to be aligned with customer needs, but each requires different funding strategies. The successful SaaS CFO plays a key role by leading this discussion within the C-suite and by formulating the appropriate financing strategy based on the decision the team ultimately makes.

#4: Superior Fundraising Skills

Access to capital is one of the most important determinants of a company’s success. The CFO understands the company’s cash needs across different worst-case to best-case scenarios based upon business operations performance as well as macroeconomic, market-based factors. The CFO must closely monitor company performance and continually revise cash flow forecasts as opportunities and challenges arise. The ability to maintain access to capital is a key success factor for the company. The successful SaaS CFO understands the most relevant metrics for fundraising and crafts the investor story for maximum appeal. Prospective debt and equity investors look for specific SaaS metrics, which must be immediately available. If a company’s business uses uncommon metrics, then the CFO needs to assume a teaching role and ensure these potential investors understand the value of the metrics and how to interpret them. And, as I discuss above, the CFO must know “the Ask” in terms of dollar amount as be able to describe how funds will be used and the value to be gained from the investment. Successful SaaS company fundraising requires both a strategic mindset and deep SaaS business experience.

#5: An Aptitude for Talent Acquisition and Management

Although the current economic downturn may begin to ameliorate the brutal fight over talent, all businesses continually face a challenge around recruiting and retaining the best people. Talent tends to move toward large corporations as employees seek stability in uncertain times. As we reach further afield for talent, we need to keep in mind the importance of hiring someone with SaaS knowledge. In my experience, employees without this background, at any level, will struggle to understand SaaS if they have not worked in SaaS companies. I continue to believe that a strong SaaS knowledge base is a key success factor for SaaS companies. And talent acquisition requires strong SaaS experience for the SaaS CFO.

FLG Partners has helped hundreds of SaaS businesses improve their performance and deliver value to their investors. If you are a CEO or board member seeking CFO consulting counsel and advice, do reach out to us. We’re happy to help.