5 effective ways to reduce your cash burn for SaaS company (Part 1)
Today, let's cover ways to cut your startups cash burn rate. In a next article, we will review ways to increase cash reserves and how to better manage its working capital.
So why should you be looking at your SaaS’s burn rate more, especially now?
Due to the general decline in economic activity, including recession, it is recommended to take a conservative approach and implement actions to extend your runway ideally after 18 months.
If your company is facing a downturn that has caused an unexpected drop in sales outside your control, your cash flow might not look great. Hopefully, there are a few ways you might be able to reduce the cash you are burning each month.
First, review your financial statements to understand what all expenses the business can cut or remove.
Here are 5 ways to fix your operating cash burn now.
1/ Cut people cost
Of course the biggest cost is staff. It is usually the largest expense on a SaaS P&L. We can slow down or stop hiring, or in a worst case scenario, reduce headcount.
There are several options to cut people cost.
First, you can reduce head count: You can carry out performance evaluations every quarter to understand people who are not really contributing or producing 50% of their potential but are still on the payroll. Then, rank them by most to least critical by assessing how it would affect your business. For some, you might want to do a performance improvement plan or PIP, to help them get back on track and help these people succeed.
Finally, to make sure that your business remains strong, you should try to eliminate any redundant employees.
Second, you can replace current employees with temporary worker.
Temporary staffing agencies offer a cost-effective alternative for companies in need of a workforce. Some benefits of using these types of agencies is that they can provide workers such as a fractional CFO that are suited to the needs of the company and can also provide an alternative for seasonal work.
Third, Collaborate with other SaaS businesses by sharing your staff and costs.
In some cases, you may want to keep your qualified employees even if they are not fully loaded. A shared staffing model where other SaaS companies can share their staff and costs for a set period of time can be a great solution until better days come.
Finally, you can do a 10 or 20 percent pay cut across the board. We recommend this option as a worst-case scenario, as it might scare a lot of people and the strongest people may actually leave. However, if you still want to go with the pay cut like 15%, we do recommend management take like a 30 or 40 cut to show the example and you are taking the pain yourself as a manager.
2/ Cut your vendor expenses
There are 2 ways to reduce vendor cost.
First, implement cost saving initiatives.
Go through your general ledger and look for vendors you should not be paying for. Rank them from most expensive to least expensive. Investigate the nature and purpose of each expense. Terminate all vendors you do not really need. Additionally, you will find a lot of SaaS subscription tools that are not really used or from which the number of paid users is greater than the number you need. You should change your subscription plans to lower rates and adjust the number of paid users to your needs.
Second, renegotiate payment terms and conditions with each vendor to get substantial discounts.
A lot of vendors often offer discounts to those who renegotiate their payment terms. The tricky part is that you need to contact each vendor and negotiate their own set of terms. This is time-consuming and can be difficult, but it can help to substantially reduce costs. For example, AWS might represent a big chunk of your Cost Of Goods Sold (COGS) expense line item. Apply to their credit program to benefit from a set of credit and discount programs would definately help.
3/ Outsource your accounting or more back office activities
Outsourcing is a great solution for businesses that only need expertise and resources as they grow. It does not impact your reputation or team morale in case of layoffs. It is more flexible and adaptable when you move down or up again. It can significantly reduce your costs, by moving one set of specialized tasks (e.g. accounting) outside the company, leaving other more strategic tasks to still be completed internally.
4/ Cut down travel
Cutting travel by encouraging remote working and video meetings can actually save a lot of money. However, we also need to keep in mind how important it is to keep face-to-face meetings with colleagues and clients and you absolutely need to keep every travel that would generate additional immediate or future sales.
5/ Cut down marketing
If you have revenue and a full-fledged marketing team, make sure that the whole marketing funnel will be paying for itself or more. Check the process of turning brand awareness into leads and leads into converted customers. Then, calculate the potential total annual contracting value and make sure it is higher than your current marketing budget.
Otherwise, cut any marketing expenses that do not directly impact the sales funnel on the short run, such as some branding marketing activities as an example.
We hope that these learnings were insightful. Unfortunately, the market is tough right now, so hopefully these ideas help. If you have any questions on this or extending your runway, do not hesitate to contact us.