Understanding the cash burn and runway challenges for SaaS in 2023
Cash burn refers to the amount of cash a company spends each month to finance its activities, while runway refers to the length of time the company can continue to perate before exhausting its cash reserves.
Cash burn and runway are key issues for SaaS companies in 2023. These companies often depend on fund-raising to finance their growth, and therefore have high expenses to develop in their market.
Without effective management of their cash burn and runway, companies can quickmy run out of liquidity, with serious consequences such as company closure or dilution of investors’ stakes.
Therefore, it is important to implement measure to optimize cash burn and lengthens runways, in order to reassure potential future investors and promote long-term profitability. Companies can quickly find themselves in financial difficulties, as Zendesk pointed out in a recent article, which can sometimes lead to consequences such as:
- Lack of liquidity to finance activities
- Dilutive financing needs
- Loss of investor confidence: if a SaaS company is unable to manage its cash burn and runway effectively, this can lead to a loss of investor confidence.
How can you optimize your cash burn and optimize your runway?
SaaS companies can implement various measures to reduce cash burn. The first is to ccut costs of rationalizing unnecessary expenditures and optimizing processes.
The second way to reduce cash burn is to increase revenues. Companies can raise their prices, or explore new markets to reach a wider audience.
As for extending the runway, there are various solutions, such as raising funds from investors, bank loans, bootstrapping (equity financing), seeking subsidies or government aid, not forgetting convertible purchase bonds, or Revenue-Based Financing such as that offered by Silvr, which offers digital companies a new way of financing their growth.
Since 2020, Silvr has deployed over 100 million euros. Partoo, Virtuo, Merci Handy and over 300 other companies can trust Silvr to Boost their growth.
How does Revenue-Based Financing work ?
Revenue-Based Financing (RBF) is an alternative financing method that allows SaaS companies to finance themselves in exchange for a share of future revenues. This means that companies don’t have to issue additional shares or mortgage assets, but can instead obtain financing based on their ability to generate revenue.
RBF can be an attractive option for companies seeking to avoid the costs of dilution associated with traditional fundraising; while benefitting from flexible, growth-oriented financing.
Entrepreneurs can apply for financing online, in just a few minutes and with no need for collateral or capital dilution. They can finance marketing expenses, recruitment, inventory and more, without dipping into their cash flow.
Silvr helps growing entrepreneurs develop their financing strategy, thanks to their technology and expertise. Two out of three companies are financed twice or more.
Silvr is backed by leading European investors, has offices in Paris and Berlin, and employs over 100 experts worldwide.
This solution optimizes SaaS purchasing within the framework of the company’s business. SaaS Procurement delivers significant savings on software and service costs, while extending the life of your business.
Let’s look at a concrete example:
A scale-up with 400 employees spend an average of €4500 per year per employee on SaaS. The total budget can quickly reach €1.8 million. By Identifying areas for optimization, savings of between €450 000 à €630 000 could be achieved.
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With the economic recession, the impact of these savings could be even greater right now. 36.84% of SaaS companies have increased their prices between 2022 and 2023, with an average increase of 16.08%, as Google and Gitlab announced a few weeks ago.
Here's a 3-step method used by Welii to identify areas for optimization:
1 — Identification
Identification is a crucial step in the process of optimizing a company's spending. It involves collecting and analyzing data on company spending to determine where savings can be made. SaaS spending, for example.
The first step in this identification process is the creation of an expense map. Expense mapping is a tool that enables you to visualize all your company's expenses as a whole, in aggregate.
It helps to understand where the company's money goes, what the main categories of expenditure are, and how they are distributed. This helps highlight unnecessary or excessive expenditure, as well as areas where savings can be made.
Which brings us to the next step, rationalizing expenses.
2 — Streamlining
Spend rationalization involves identifying unnecessary or excessive costs, and finding ways to reduce or eliminate them. In the SaaS context, this means reviewing all software subscriptions and contracts used by the company, determining which are essential and which are not, and finding cheaper alternatives or eliminating those no longer needed.
This can be done by prioritizing the SaaS that are most important to the company, setting up a renewal schedule and identifying duplicates.
Using benchmarks, the company can also challenge existing inventories to ensure that the software and services used are the most appropriate and cost-effective.
3 — Purchasing management
Purchasing management involves regularly monitoring expenditure and assessing its impact on the company's cash burn and runway.
It is important for SaaS companies to have purchasing management tools to monitor and measure the effectiveness of their cost optimization measures, in order to guarantee the company's long-term profitability.
This can help ensure that in-house teams use the most cost-effective and appropriate software and services, while helping to extend the life of the business by reducing costs.
On average, the potential savings on SaaS can be broken down as follows:
In conclusion
In conclusion, cash burn and runway are key issues for businesses in 2023. Poor management can quickly lead to implications such as lack of liquidity, need for dilutive funding or loss of investor confidence. Therefore, businesses must put in place measures to optimize their cash burn and extend their runway, in order to reduce their reliance on investors and promote long-term profitability of the business.
One of the solutions to optimize both cash burn and runway is SaaS Procurement, which optimizes SaaS purchases as part of the business' activity. By using this method, businesses can make significant cost savings on software and services expenses while extending the lifespan of the business.
In addition, there are also innovative solutions, such as Silvr, which enable companies to quickly and easily get on-demand financing. The platform leverages AI to assess a company’s solvency and offers tailored financing offers in a matter of minutes.
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