Collections in SaaS startups: why you need to get ahead of the curve

Thursday 19 May 2022 09:03 CET | Editor: Claudia Pincovski | Interview

Paul Jozefak, the co-founder and CEO of receeve, highlights 5 steps to avoid running out of working capital and maintain a cash runway to protect and grow your business.

Collections – what is it?

Collections is the process of getting paid for products purchased or services rendered, it’s redeeming or collecting accounts receivable (A/R) from your customers. It usually starts with reminders before the payment is due (also known as pre-collections). If the payment is not made promptly, your customer enters into varying stages such as net 30, net 60, and net 90 days sales outstanding (DSO) or days past due (DPO). During the debt collection process, it is key to negotiate payment terms to ensure payment options can be offered to allow the debtor to repay as quickly as possible.

The process is handled by an internal team but if not collected, claims can be assigned to a hired third-party collections agency.

How big is this problem and what is the impact on SaaS startups?

In February 2022, the European Union household debt reached USD 7,208.3 billion. The problem of customers not paying their bills arises in all businesses across verticals and, with unpredictable and challenging economic times, it can become a large strain on a startup's liquidity and cash flow. Collecting accounts receivables and addressing collections before it significantly affects your cash flow is one of the biggest challenges software startups face today. Many bills just won’t get paid without your follow-up.

The European Commission has stated that ‘only 40% of businesses are paid on time in the EU. COVID-19 has exacerbated this situation. Payment durations have deteriorated and the number of excessive payment delays (i.e. more than 30 days) has increased across all sectors. For an SME, now, being able to cash its invoices on time makes the difference between survival and bankruptcy.’

Businesses invest significant time and budgets in acquiring customers and a customer journey involves experiencing your brand and your business end-to-end. However, no one ever discusses debt collection, even as a detour in the customer journey. Having a recovery and collections strategy in place can not only help your hard-earned customers regain financial control but also helps your business regain financial control to ensure your continued growth.

If your customers cannot repay, then your organisation’s profitability is at risk even if your acquisition is skyrocketing. Your next funding round will be much more difficult with lower ARR numbers due to unpaid claims literally erasing the gains of your customer acquisition investments. At the same time, your burn rate will be much higher, and you will need the next funding round much faster. You’re cash strapped.

This state of being cash strapped might sound like a normal aspect of any startup's ‘course of doing business’ journey but, just in the last two years, some 600,000 new startups had to shut shop due to cash flow problems. Businesses with great products and solid revenue models have failed due to the neglect of a critical business function.

SaaS startups that prioritise debt collection from a very early stage and focus on developing KPIs around cash flow will have slower burn rates, outlast their competition and achieve their long-term goals.

What should startups know to be proactive about addressing this challenge?
Even larger companies face inconsistent cash flow, spending up to 12 hours on average chasing overdue payments from customers every week. Debt collection inefficiency is estimated to amount to USD 800 billion in the US alone.

Generally, the focus in startups is on product development, and they chase hypergrowth with investment in marketing and sales campaigns. You set up payment gateways and invoice terms but, if a subscription or invoice is not paid, processes rarely exist to address the ‘not so sexy’ debt collection function - it is just not prioritised. And the longer these remain unpaid the harder they are to collect.

SaaS startups must build well-defined processes and systems for collecting payments from their customers and strategies for engaging third parties when recovery is not achieved. Investments in customer acquisition and in creating a frictionless buying process are of course extremely important for growth. But, to show profitability, you must also create frictionless strategies when customers cannot repay as expected and are in vulnerable economic situations.

Once your product or service finally starts gaining momentum, the last thing you want to be spending your time on is a debt collection function.

What strategies would you recommend SaaS startups apply to address collections?
The first step is to understand how delinquencies in payments affect your cash flow. Start by defining your actual monthly recurring revenue (MRR) and try to derive what percentage of the MRR is actually being collected. This will help you understand monthly incoming cash flows and identify trends and where you have issues. SaaS startups should be pushing to collect at least 100% of the MRR and with pre-payment of annual contracts and renewals, you can set that target above 100%.

Create payment terms that encourage pre-payment when signing a deal, and secure even partial payment upon deal closing. For monthly subscriptions, incentivise moving to annual plans. In the early stages, pay commissions that are aligned to customer payment. Actively monitor your MRR and assign someone to manage debt collection processes, metrics, and optimisation.

Leveraging the power of digital recovery systems can be a game-changer at a SaaS startup as the business starts scaling. Digital engagement and automation can proactively send reminders and personalise communication. Omni-channel self-service for customers allows you to use the digital channels they prefer to explore promises to pay and payment options to self-cure. Research shows digital options outperform traditional channels and methods and create a better experience for the customer. This allows you to retain your customers even if they have a delinquency ‘detour’ in their journey.

Implementing and monitoring a collection strategy monthly will improve cash flow and make your business model scalable.

How can startups maintain and build a cash runway? And how does receeve support the effort?
Startups that want to be ahead of the curve and scale their operations should consider the following:
  • Self-service and automation

Make it easier to follow up on payments by leveraging automation to engage customers at every stage of the payment and or collections journey. Offer self-service options for customers to self-cure.
  • Digital engagement to remind and follow-up

Communicate 60, 30, and 7 days before the invoice due dates and renewal dates, and encourage pre-payments. If customers miss payments, personalise messages, channels, and options. Traditional outbound calling and letters are no longer the most effective strategy for recovery or for maintaining your brand reputation.
  • Offer early payment and pre-payment discounts

Consider offering 2 to 5% discounts for paying ahead of time. You get paid faster and avoid playing catch-up.
  • Pay commissions/ bonuses when payment is collected

Avoid paying large commissions before the payment is in the door. Pay commissions aligned to payment.
  • Go cloud-native

Optimise your resources to run your core business. These applications are pre-built and ready to integrate data from any system faster, gaining insights, and maintaining compliance. You realise benefits with little or no delay and take advantage of built-in best practices and reporting.

About Paul Jozefak

Paul Jozefak is the co-founder and CEO of receeve, established in 2019 in Hamburg, Germany. As an experienced VC and successful founder of multiple innovative organisations, Paul brings with him a wealth of experience across enterprise software, fintech, digital transformation, and innovation.

About receeve

receeve is an all-in-one collections platform that leverages the power of automation and AI to empower businesses to be proactive, improve cash flow, reduce manual processes, and increase revenues with minimal IT support. Our clients see 30% average increase in recovery rates in the first two weeks and are up and running in weeks with our first-class customer success team.

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Keywords: SaaS, startup, accounts receivable, payments , cash flow, COVID-19, SMEs, investment, digitalisation, financial services
Categories: Payments & Commerce
Companies: receeve
Countries: World
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Payments & Commerce


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