Waiting For Today To Happen
I’ve just completed my first year as Financial Controller at Software Europe. The time has brought some interesting challenges to me and the business. It’s not the usual problems that you may come across such as poor cash flow, lack of new sales, and loss of existing customers. Our challenge is much different and more difficult to understand and to put it bluntly; we’re waiting for the rest of the world to catch up!
Being a Software-as-a-Service (SaaS) company we live and breathe the internet and cloud technology. It’s where the world is, you’ll be hard pressed to go about your everyday life without using the internet in some form.
Yet we’re still waiting for some very important industries to drag themselves into the modern day. One of the biggest drivers for us is continued growth, we refuse to stand still and we’re not afraid to make large up-front investments to drive those ambitions. We have and will continue to plough any profit straight back into development knowing that this will not only help to retain existing customers but also generate new customers and future larger profits.
These investments are all expensed in current EBITDA and that’s where the challenge really begins. As soon as you approach financial institutions they measure the value of your business on a multiple of your EBITDA. Forget the numbers that actually matter, a multiple of Annual Recurring Revenue (ARR) or guaranteed contracted income for the next 5 years, many can’t get passed that EBITDA figure. In essence they want us to stand still or take a step back to move forward.
We could quite easily sit back and reap the benefits of ARR and post a huge EBITDA figure at the year-end which as the Financial Controller I of course would be absolutely delighted with! But who else would be? Would our customers be happy that we’d failed to develop to further improve their experience? Would we be happy that we’d stopped innovating? It’s a lack of understanding of the SaaS model and one which we will continue to educate on knowing that one day people will catch up.
Another challenge SaaS companies face is deferred revenue and how it’s perceived in certain industries, particularly the effect it can have on the company credit rating. Like most SaaS companies we bill customers in advance for our service which leads to deferred revenue on our balance sheet. This is looked upon as negative working capital and represents a debt to the business. The reality is that this deferred revenue is not like other liabilities, the deferred revenue liability reduces over time through the delivery of the service and there isn’t a cash drain on the company that the figure on the balance sheet suggests.
We may be judged on certain metrics but it’s an amazing position to be in knowing what our ARR and guaranteed contracted income is and the financial stability that this give us.