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May 13^th 2022

Metrics

The importance of SaaS metrics to attract investors and grow your company

SaaS (Software as a Service) is experiencing major growth, with the sector growing from $120.7 bn in 2020 to an estimated $171.9 bn in 2022 (Gartner, 2021¹). This has attracted new companies to the sector, each offering a new perspective as they attempt to attract new investors and find new customers in different markets.

Even with the increased market size, it can be challenging to stand out from the crowd. So, how can you ensure your company gets the investment it needs?

The simple answer is metrics. Reliable and consistent metrics are an important benchmark for potential investors. However, defining the right metrics and following them up correctly is easier said than done. Let’s take a look at four industry standard metrics your SaaS company needs to be monitoring.

Monthly recurring revenue (MRR)

This measure of predictable revenue flow makes accurate financial predictions about your SaaS business, making it a key indicator of growth. You can also use MRR to monitor the momentum of your business, gain insights into your overall profitability and cashflow, and help set future goals.

How to calculate your MRR:

average revenue per customer per month x the total number of monthly users

MRR can also be used to calculate your MRR growth rate:

(current net MRR – last net MRR)/last net MRR

Annual recurring revenue (ARR)

While MRR looks at your monthly recurring revenues, ARR takes a longer view and reflects your revenue throughout the year. It is particularly useful for companies with lower transaction volume but higher transaction values.

Companies of all sizes can use ARR to measure their positive momentum (new sales, renewals, and upgrades) and negative momentum (downgrades and lost customers). This clarifies the overall health of your company, showing performance in specific areas and generating insights into customer wants and needs, including suggestions for cross-selling and upselling.

Customer acquisition cost (CAC)

CAC tells you how much it costs to acquire each new customer, lead, or subscriber. It enables you to evaluate your effectiveness at each phase of the customer acquisition journey, as you move from attracting visitors to converting them into users then subscribers. The insights generated from this evaluation allows you to optimize your investments to lower your CAC, which has a direct impact on your potential CLV (see next section).

Customer lifetime value (CLV)

How valuable is each customer to your business over the entire period of your relationship? The answer is the CLV, which includes your customers’ revenue value, CAC, and expected lifetime as an active customer.

Finding ways to increase the CLV is a good way to stimulate growth as it costs less to retain an existing customer than to acquire a new one. Plus, the CLV enables you to identify the most valuable customer segments in your target market so you can optimize your strategy to maintain (or improve) profit margins.

Talk to the experts

How well does your company monitor and evaluate these important metrics? Contact CFOrent if you would like expert help to ensure reliable and consistent follow up of your SaaS metrics to improve your company’s financial strategy or attract new investors.

1 https://www.gartner.com/en/newsroom/press-releases/2021-08-02-gartner-says-four-trends-are-shaping-the-future-of-public-cloud

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April 15^th 2022

Metrics

How liquidity metrics can make the difference when it comes to growth

Companies want to expand their operations, grow into new markets, and serve new customers without compromising their profitability. To achieve this, you need to balance you cash inflows and outflows. But how can you boost the financial health of your company to give it the best opportunity for growth?

Using metrics to measure your liquidity will help you to follow up your cash health and give you insights on how to improve it. Let’s take a look at some useful liquidity metrics and see the benefits they offer.

Current ratio

Also known as working capital ratio

Including all current assets and liabilities, the current ratio measures your company’s ability to pay short-term liabilities or obligations (within a year). It shows investors how your company can maximize your current assets to meet your current liabilities. It is worth noting that the current ratio only gives a snapshot into your finances, so doesn’t give a complete reflection of your short-term liquidity or longer-term solvency.

A current ratio in line with or slightly above the industry average is considered acceptable, while a lower ratio may indicate a higher risk of distress or default. However, if the current ratio is significantly higher than the industry average, it indicates that management might not be using its assets efficiently.

How to calculate your current ratio:

current assets / current liabilities

Quick ratio

Also known as the acid test

The quick ratio is an indicator of your company’s short-term liquidity position and measures your company’s ability to meet your short-term obligations with your most liquid assets, without selling stock or obtaining additional financing. The higher the ratio, the better the company’s liquidity and financial health.

As the quick ratio does not include inventory, which is difficult to turn into cash in the short term, it is considered more conservative than the current ratio.

How to calculate your quick ratio:

(current assets – inventory – prepaid expenses) / current liabilities

Cash ratio

The cash ratio tells creditors and analysts the value of your company’s current assets that can be quickly converted into cash and what percentage of your company’s current liabilities these cash and near-cash assets can cover. It is useful for creditors when deciding how much money they might be willing to lend to your company.

The results can be a cash ratio of 1 (the company has the same amount of current liabilities and cash), less than 1 (the company has insufficient cash to pay all current liabilities), or more than 1 (the company will have cash over after paying all current liabilities).

How to calculate your cash ratio:

(cash + cash equivalents) / short-term liabilities

Days sales outstanding (DSO)

Also known as days receivables or average collection period

How long does it take your company, on average, to collect payment for a sale? The answer is your DSO. Calculated on a monthly, quarterly, or annual basis, companies aim to receive payments quickly to keep their DSO as low as possible and ensure a smooth cashflow. Generally, a DSO of less than 45 days is considered low.

How to calculate your DSO:

(receivables/total sales) x days

Days payables outstanding (DPO)

As the opposite of DSO, DPO monitors the average time taken (in days) for your company to pay your suppliers, vendors, or financiers. Measured on a quarterly or annual basis, DPO indicates how well your company’s cash outflows are managed.

There are pros and cons to having a higher DPO. On one hand, it enables you to hold onto funds for longer so you can maximize benefits, increase your working capital, and free cash flow. But on the other hand, it can also be a red flag, indicating an inability to pay bills on time.

How to calculate your DPO:

(accounts payable x days) x cost of goods sold

Days sales of inventory (DSI)

Also known as days inventory outstanding

The DSI indicates the average time taken for your company to convert your inventory, including works in progress, into sales. In other words, it shows how long your company’s cash is tied up in inventory and how long the inventory will last. While the average DSI varies from industry to industry, a lower DSI is preferred as it indicates that it will take less time to clear inventory.

How to calculate your DSI:

(average stock / cost of goods sold) x 365

Cash conversion cycle (CCC)

CCC measures the time lag between the purchase of your company’s inventory and the receipt of cash from accounts receivable. By looking at how long your company’s cash remains tied up in your operations you can see how efficiently your managers manage your working capital.

A longer CCC means it will take longer to generate cash, which can mean insolvency for small businesses. A shorter CCC is a sign of a healthy company as it can use the extra cash to make additional purchases or pay off outstanding debts.

How to calculate your CCC:

DIO + DSO – DPO

days inventory outstanding + days sales outstanding – days payables outstanding

Talk to the experts

Interested in finding out more about liquidity metrics and how they can help boost your company’s financial health? Contact CFOrent for expert help and insights on improving your cashflows.

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February 19^th 2022

Uncategorized

Scenario modelling

Explore the future to tame uncertainty

It is being said that entrepreneurship is only for the daring. And entrepreneurship does indeed go hand in hand with uncertainty: no one knows what the future will bring or what impact it will have on your sector or your business. But it is possible to manage your doubts. How? By drafting future scenarios.

Making decisions on the basis of strongly substantiated scenarios

You make operational decisions for your business every day, adjusting your strategy when necessary, always fully aware that every decision you make has its consequences. You need to keep in mind the various external and unpredictable factors that influence the economic climate and the dynamics of your sector. When you combine all these elements, it’s possible to compare entrepreneurship to a series of falling dominoes. You just don’t know which direction they’re falling in.

When is your cashflow at risk of drying up? When should you expect extra turnover or extra costs? When is it time to expand your range? Alternatively: when is it time to cut back your range? Which extra actions are needed to achieve the growth you’re aiming for? And how do you change the strategic course of your business? These are all questions that you’re best answering on the basis of insights instead of using gut feeling as a guide.

This is why it’s good for you to draft your future scenarios with the different data that your business collects. These scenarios allow you to translate your data into insights. Intuition and doing business with gut feeling is important but is best supported by testing assumptions. Building a modular model, based on internal KPIs and measurable metrics, can be of great value in making informed decisions.

Therefore, it is a good idea to build future scenarios with the various data you collect in your company. This way, you translate that data into insights to make better decisions.

Start with hypotheses and move forward with parameters

You start drafting your scenarios using a number of premises: estimates that bring you through to the future. First, you collect all the parameters that come into play with each other to determine the future prospects of your business. Think about the price of your raw materials, market demand, energy prices and so forth. Every business is different. As such, the parameters every business uses for its scenario modelling are also different.

To set up the scenarios you manipulate the different parameters. The testing of scenarios can be done by adjusting different parameters. The effect of adjusting a certain parameter can thus be estimated. For example, when the decision for an additional employee has to be taken, capacity planning can be used to estimate whether this is optimal for the company. After all, this employee will bring with him a cost but also an expected added value. Endless combinations are possible and so you make various simulations: from the best case scenario to the worst case scenario and everything in between.

Watch developments over time

The result of these scenarios is a visual presentation of the various predictions. You choose for yourself which indicators you’ll zoom in on: cashflow, gross margin, turnover, direct costs of the products you sell or any of the other possibilities … It’s particularly the way these figures evolve over time that makes scenario modelling interesting. You learn what the impact is when a specific parameter changes at a specific moment in time.

To successfully analyse the data in a scenario model and to visualise it, you need expertise and insight in the model. CFOrent helps you with this. The most important benefit is that you can make well-founded decisions to build a successful future. However, with scenario modelling, you can limit the uncertainties. Entrepreneurship is not necessarily just for the daring … It’s for anyone who makes well-reasoned decisions.

Would you like insight into the future of your business? Contact CFOrent via contact@cforent.be today!

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January 14^th 2022

Fundraising

Mezzanine financing: between loan and venture capital

You need capital, but you’ve exhausted the possibilities offered by the bank. You don’t need to resort to venture capital right away. Mezzanine financing gives you the flexibility and freedom of private equity and comes in the form of an ordinary bank loan. There are no interim repayments. And most importantly: you keep full control of your business.

What is mezzanine financing?

Mezzanine financing lies between a classic bank loan and venture capital. It’s a subordinated loan, usually for a period of 5 to 8 years without interim repayments. You pay back the entire loan on the due date at the latest.

When should you choose mezzanine financing?

If you are no longer eligible for a conventional loan from the bank or for an additional loan because the risk of non-repayment is too great. In that case, large companies often resort to public capital markets. But that option is far too expensive for SMEs. Mezzanine loans are used to make large investments, for example, but even more often they occur in the event of takeovers, a management buyout or a switch of shareholders.

With or without warrant

Various forms of mezzanine financing exist. The best known is the subordinated loan. The term ‘subordinated’ refers to the moment when things go wrong. Is your company heading for bankruptcy? In this case the lender is subordinated to the other creditors. Another form is a mezzanine loan with a warrant or option. Are you unable to repay the loan on time? The investor becomes a shareholder in your company. Because the risk is much higher for the lender and you may not be able to give guarantees, the interest rate is much higher than with traditional loans.

Advantages and disadvantages of mezzanine financing

Advantages

Disadvantages

● The loan is flexible. No guarantee or intermediate repayments are required. You only have to repay the interest.

● The interest is tax deductible and can be deferred. Are you unable to pay the interest on the agreed date? In that case, part or all of the interest may be deferred.

● An entrepreneur does not have to sell shares and therefore remains in control of his/her business. This is ideal for family businesses seeking growth capital but who want to remain independent.

● You can repay the loan early.

● Mezzanine financing is long-term financing. In other words you have time to refinance the capital

● The interest rate is high, up to three times higher than the interest rate of a traditional bank loan.

● The return, in proportion to the high risk, is relatively low – on average between 8 and 15%. This is primarily a disadvantage for the lenders, but for you it means that lenders are sometimes not so keen on mezzanine financing.

Contact us here for more information or guidance in structuring the bridge between a loan and venture capital.

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December 11^th 2021

Fundraising

IPO: every entrepreneur's wet dream?

Over the past three years, 830,000 Belgians have traded on the stock exchange. And in the first lockdown, up to 5 times more BEL20 shares were traded than before the crisis. Have you ever thought about going public? Discover the advantages and disadvantages of your company going public and how an IPO works.

Why do companies go public?

You probably know the largest Belgian listed companies: they include AB InBev, KBC and Umicore. You undoubtedly also read in the newspapers that Club Brugge had plans to go public in early 2021, but eventually backed out due to a lack of interest among investors.

But why do companies go public?

To attract additional growth capital: most companies take their chances on the stock market to raise a lot of fresh capital. Shareholders sell some of their shares on the public market. With the extra financial resources, they can, for example, develop new products, expand their activities or explore foreign markets.
Prestige: an IPO results in a great deal of publicity. Just think of the announcement of Club Brugge, or the buzz around Antwerp chemical distributor Azelis, which has been listed since September 2021.
Cash in: a third reason to go public is to cash in on shareholdings. In this case you don’t raise money to develop your business, but to earn money yourself.

Did you know: if you want to go public, you can decide which shares are listed and which are not.

What is an IPO?

IPO stands for initial public offering and is also referred to as initial offering. It is the moment when companies go public for the first time. The Euronext Brussels home page shows which companies recently launched an IPO. These newcomers were allowed to ring the stock bell that day. However, they have to go through a long process to get to this point.

The (long) route to going public

What’s the process when you decide you want to go public?

Choose an investment bank: invite several investment banks to explain your stock exchange plans. One of these banks will act as an intermediary between you and the potential shareholders. They are referred to as underwriters.
Draw up a prospectus: if you want to go public, you must have concrete growth plans. And these plans are revealed in a prospectus. It also contains a detailed analysis of your company, with information about your assets, financial position and financial prospects.
Submit your application for a stock exchange listing: you submit your application, including the prospectus, to Euronext Brussels. The Financial Services and Markets Authority, the Belgian stock exchange watchdog, will also examine your file and you receive an answer within 30 days: an approval, a rejection or a request for additional clarification.
Negotiate with potential shareholders: at the time of filing, the IPO marketing machine starts. Your investment bank will actively look for potential investors. You will know immediately if and how much interest there is, and have an estimate as to what price the investors are willing to pay.
Publication by Euronext: has your stock exchange listing been approved? Euronext will publish a notice with the IPO date, information about the shares on offer and the conditions for potential investors. Trading can start.

Certainty first, then a stock exchange application

Going public is an intensive and costly process. You need to be prepared to disclose all your financial data. Information about your turnover, profits and managers’ salaries and bonuses will be publicly available – also to your competitors, customers and employees. You also have less control over your company. And you have many administrative and accounting obligations. In other words: going public only makes sense if you know in advance you will raise a lot of money.

You have big growth plans and you want to know if an IPO would work for your company? Please contact CFOrent on our contact page or via contact@cforent.be,.

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November 29^th 2021

FP&A

Do you have a full financial overview, including your accruals?

Imagine you deliver a service or product today, but don’t send the invoice until next month. Is this transaction reflected in your accounts? In accrual accounting, you also include those accrued costs and revenues. This means you have a clear insight of your financial situation at any time and you can make informed business decisions. Find out what accrued costs are and why it is worth including them in your balance sheet.

Why having an insight into your company’s financial situation is so important

As an entrepreneur, you probably work very hard every day. However, that doesn’t mean your business is successful. For your business to grow, you need an insight into your financial figures. Is all your hard work earning you enough money? Are you anticipating a downturn or a big investment that you should prepare for? And does your profit-and-loss account take into account the real financial picture at this moment? Often, this last question is where things go wrong.

Cash-based accounting versus accrual accounting

Many start-ups and smaller companies have cash-based accounting, and do not book their costs or revenues until the money actually leaves the account or is in the account. This gives you a distorted idea of your profits. Imagine you provide services or sell a product in February, but you’re not paid until March. This transaction will only show up on your balance sheet in March.

Accrual accounting takes sales into account when the sale actually takes place. This type of accounting follows the matching principle: you account for related costs and revenues in the same period.

Accrued costs and revenues

Accrual accounting therefore takes short-term accruals into account. And they exist in 2 directions:

Accrued costs: you have already used services or products which you have not yet paid. Think of monthly cleaning costs that are paid per trimester, advertising costs or an order with a deferred payment. Or you give your customers a volume discount.
Accrued revenues : you have already provided services or goods for which you did not yet send the customer an invoice.

Accruals are not reserves

What is the difference with reserves in your accounts? A reserve is built up to cover possible losses or investments in the long term. And you know exactly when accrued costs and revenues will be paid, which is often not the case with reserves.

Advantages of accrual accounting

Regardless of whether you choose cash-based accounting or accrual accounting, your final turnover remains the same. However, accrual accounting that takes into account accruals does have other advantages:

You know at any time exactly what you still have to pay and receive.
You have a far more accurate and detailed idea of your turnover – regardless of the terms of payment.
You can plan ahead more easily. This allows you to maintain your stock levels and hire the necessary staff in good time.

Questions about accruals? Ask CFOrent for advice

Accrual accounting works best if you respond quickly in terms of your balance sheet and profit-and-loss account. No time? Let CFOrent help you. As freelance financial professionals, we closely follow your business figures, correctly estimate costs and revenues of provided transactions and help you to interpret your balance sheet. This allows you to make better decisions, in the short and long term.

Request support or ask your question via contact@cforent.be.

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November 14^th 2021

Tax

Financial difficulties? Comply with Belgian regulation

Article only available in dutch.

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November 5^th 2021

Tax

Innovation deduction

Article only available in dutch.

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October 28^th 2021

FP&A

Management Reporting: Make smarter decisions about your company

Companies rely increasingly on management reporting to improve their business operations and to stay one step ahead of their competitors. What is management reporting? And is it a must for your company?

What is management reporting?

Management reporting is a form of business intelligence. The software collects data on various business aspects and organises them into a clear overview. This overview provides answers to questions such as:

Is it a good idea to hire more employees?
Which customers generate most profit?
Should we increase our marketing efforts?

Because data are easier to interpret, it becomes easier for decision-makers to make decisions with more impact.

How does management reporting work?

Management reporting collects data on the various departments of your company. Reporting is based on financial and operational data, which are organised into a digital dashboard. It gives you a clear picture of your company’s health over a given period.

Management reporting works with KPIs (key performance indicators). If they are not achieved, you immediately know where to adjust.

What’s the point of management reporting?

Professional management reporting software provides a detailed overview of how your company is performing. It ensures you are making the right decisions and you are not having to chase after the facts. This means:

More efficient operational processes in your company.
You can monitor the progress
Your company remains a formidable competitor.
More efficient business management.
You are steadily working on improving your business.

What’s the difference between a financial and a management report?

Management reports and financial reports are sometimes mixed up. But there is a big difference:

Your company keeps financial reports for accounting purposes. They provide an overview of your company’s performance, but are not detailed enough to make effective adjustments.
Management reporting is up to date and combines not only financial, but also operational data. This means it’s easier to make adjustments on time and to monitor your company’s progress.

How do I start with management reporting?

Drawing up a management report is a lengthy process. This is also necessary if you want to use the software to inform all decision-makers in your company quickly and clearly.

The choice of KPIs, for example, is a real headache: too many causes confusion and stands in the way of a quick overview.

Another issue is the structure of the data: if this is not clear, you will never get the most out of your reports.

Do you need help with your management reporting?

Management reporting provides a quick, in-depth health check of your company and helps you to be more efficient. Do you need an expert who aligns your management report seamlessly with your business and all users? Contact us: We are happy to help you.

Author: Frederik Bakx

What solvability tells your (potential) investors about your company

The importance of SaaS metrics to attract investors and grow your company

How liquidity metrics can make the difference when it comes to growth

Scenario modelling

Explore the future to tame uncertainty

Mezzanine financing: between loan and venture capital

IPO: every entrepreneur's wet dream?

Do you have a full financial overview, including your accruals?

Financial difficulties? Comply with Belgian regulation

Innovation deduction

Management Reporting: Make smarter decisions about your company