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I’ve been with Software Europe for almost two years now and was recently promoted to CFO. In that time, I’ve encountered some interesting challenges for both the business and myself. It’s not the usual problems you may come across such as poor cash flow, lack of new sales or loss of existing customers, far from it. The 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. It’s a challenge common to SaaS companies; 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. I think, in part, there’s a lack of understanding of the SaaS model. We’re constantly innovating and looking to improve our customer’s experiences and it’s an approach that is paying dividends, so being measured purely against a multiple of the EBITDA can miss the innovation that takes place. Of course, these are the experiences I’ve had a Software Europe, but these challenges aren’t individual to either me or the company. Other, similar cloud and SaaS businesses are facing the same issues. Whether your ambition is to get acquired, or to develop and grow your business to become a behemoth, educating the market on how SaaS models work and moving beyond EBITDA measurement will ultimately help your company realise its goals. Reaping the benefits of the SaaS and cloud business models only comes through understanding them.
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