A key indicator of your company’s financial health, cash flow – the inflow and outflow of money – is critical to staying afloat. The ability to pay expenses and reinvest in the business relies on maintaining a positive cash flow. One way to ensure a steady stream of revenue is with a recurring revenue billing model. Used by subscription-based companies across the globe, this billing model provides customers with access to products and services in exchange for a recurring (monthly, quarterly, or annually) fee.
Why Is Recurring Revenue Billing Important?
A recurring revenue billing model provides countless benefits, and a predictable and stable revenue stream tops the list. Although revenue is realized over the lifetime of your customers, it also provides the following advantages:
- Reduces costs of sales since customer relationships aren’t a one-time transaction.
- Opens the door to valuable customer insights gathered over the life of the relationship.
- Reduces churn by establishing deeper customer relationships and loyalty.
- Frees up time to grow the business since you’ll spend less time on new customer acquisition initiatives.
- Enables more effective expense management by knowing that at least a portion of the revenue is consistent.
- Provides increased value for investors, as the value of recurring revenue billing businesses can be up to eight times greater than that of transaction-based businesses.
- Allows you to to start each year with the knowledge of how much revenue to expect. For example, if your business generates $75 million in revenue and 75% of the total revenue is recurring, you’ll start each year knowing that you should generate at least $750,000.
As described in the last bullet, a recurring revenue billing model enables you to better predict your cash flow. It gives you the ability to estimate how much money flows into your company at any given time. This way you can manage your expenses more efficiently, as well as be able to cover unexpected costs.
While this is a high level example of projecting cash flow, your ability to accurately project cash flow will be guided by other considerations, including the subscription model or models deployed.
Common Recurring Revenue Billing Models
Dynamic billing: Enables billing innovation by providing the ability to create pricing strategies such as formula-based, time-based, demand-based, or event-based.
Flat-rate pricing: The customer is charged a set price for a product or service, regardless of features used.
Freemium: Access to a specific set of features is provided for free, however additional features or services requires the customer to upgrade to a paid plan.
Hybrid billing: Enables the combination of any billing model to provide customers with more personalized billing options. Combinations may include subscription plus one-time fees, subscription plus pay-as-you-go, or subscription plus overage.
Tiered pricing: Provides multiple levels such as a variety of plans with different products or features that are billed at a set price. Typically the customer advances to the next tier once they’ve exhausted the functionality of the current tier or have exceeded quantity consumption limitations.
Usage-based: Bill on any aspect of your offering. This could be clicks, API calls, downloads, seats, text messages, minutes, bandwidth, etc. Plus you can bill on a pay-as-you-go, tiered pricing or volume pricing tactic.
As you can see by the above recurring revenue billing models, the subscription model (or models) you choose affect your cash flow. In addition, subscription-based businesses many times encounter obstacles when calculating and managing pricing due to varying prices based on subscription lengths, as well as product and service bundling.
Tips to Projecting Accurate Cash Flow
Predicting cash flow can be difficult, especially for SaaS and recurring revenue companies. To help you accurately project cash flow, the following section provides four key tips.
1) Establish clear spend projections from all business units
Identify all units to be sold and how many sales these units will generate on pre-defined time intervals. Review the sales history of the past few years to understand past performance and what kinds of sales to expect. Sales are rarely consistent, so determine when there are fluctuations and plug this information into your projections. Remember, realistic projections prevent cash flow problems in the future.
2) Define your inflows and outflows
A cash flow prediction not only estimates revenue but how much your business will spend. Keep in mind that some of these outflows are fixed costs like rent and salaries. Variable cost outflows include those associated with the sale of the product or service and quarterly taxes.
3) Separate revenue from fluidity
When predicting cash flow, be sure to estimate when you expect payment and revenue recognition from the sale – not when the sale was made. Otherwise, you’re creating the false impression that you have more cash than has been recognized. Sales revenue is only one measure of cash inflow. Cash flow is a measurement of money that comes into a company in the form of sales and other methods. Therefore, unlike revenue, cash flow has the possibility of being a negative number or value.
4) Monitor and adjust
The accuracy of your cash flow prediction depends on the frequency of the forecasts and the details of the projections. Monitor and adjust the cash flow based on how the business is performing. By monitoring the cash flow prediction, you’ll be in the position to project cash flow with increasing accuracy.
Keep Your Cash Flow Flowing
BillingPlatform understands what innovative companies need to stay on top of complex financial operations – and we’ve responded to this need. With a platform built specifically for SaaS and recurring revenue companies, our solution enables you to maintain an efficient subledger that integrates with the company’s general ledger for budget accuracy. Our customers achieve automated efficiencies across their contracts, subscription management and usage data – giving them budget accuracy for improved cash flow projections. Learn more with a free 14 day test drive of BillingPlatform today!
