The catch-22 of SaaS scaling: How to increase cash flow to get out of a growth bottleneck

Miguel Fernandez
Miguel Fernandez
Co-founder & CEO
Posted on
May 23, 2023
min read
The catch-22 of SaaS scaling: How to increase cash flow to get out of a growth bottleneck

Scaling is the ultimate goal for most SaaS companies. It's what generates more cash, attracts more customers, secures a bigger market share, and signals an all-around successful company.

However, SaaS scaling comes with a challenging paradox: You need to increase cash flow to pay for growth initiatives, but you need to grow in order to bring in more cash. 

We call this the Catch-22 of SaaS Scaling, and it can be incredibly frustrating to deal with. You may have a fully fleshed-out plan for what you need to do to grow your business, but how are you supposed to do any of it if you don’t have the money to pay for it? Likewise, how are you supposed to get the money if you don’t accomplish the growth that would bring in more revenue? 

This is especially tricky for early-stage SaaS businesses that need to prove their worth to investors before they can secure funding. Often, right at the moment you need outside support the most, investors want nothing to do with you. Investors want to see that you’re bringing in revenue and profit—but if you were already making enough revenue to be profitable, what would you need the investors’ money for?

Fortunately, there’s a way out of this SaaS scaling paradox. This article will explore the most common growth and cash flow bottlenecks for SaaS companies, as well as potential solutions to cure these bottlenecks and increase cash flow.

6 common cash flow bottlenecks that inhibit growth for SaaS companies

Although SaaS companies are eager to grow and scale their business, they often find themselves short on the cash needed to do so. 

Whether they’re trying to pay for growth initiatives using their own revenue or trying to convince a VC investor that they’re a successful business, many SaaS founders have been shocked by the realization that they burned through cash much faster than expected and only have a couple months of runway.

This can quickly become a desperate situation, which can lead to bad decision-making. Cutting important departments, making hasty product or audience pivots, or agreeing to funding offers with unfavorable terms are all mistakes that have been made in a desperate bid to increase cash flow quickly.

Here are the 6 most common growth cash flow bottlenecks early-stage companies face that inhibit successful SaaS scaling and cause desperation.

1. High overhead costs

SaaS founders need to make heavy upfront investments in infrastructure, software, and personnel to get their businesses off the ground. Sometimes, these investments need to be made before you have a clear idea of when or how you’ll be able to make the cash back.

Because SaaS founders are dealing with an element of unpredictability, they tend to be over-optimistic and predict that they’ll reach a high volume of sales or a certain revenue target faster than they actually will. They hire and build their infrastructure based on a future “optimal” state of their business rather than the realistic modest state their business will be in for the first few months or years. 

2. Overspending (or spending on the wrong things)

Overspending and spending on the wrong things are other common problems, especially in early-stage startups. This is mostly caused by the same over-optimistic planning that leads to too much overhead spending and is especially common after securing a big funding round.

Instead of focusing on the essentials for what the company needs to survive and grow, many companies make the mistake of spending too much money on non-essentials like fancy offices, advertising, trips and lunches, or software that’s “nice-to-have” rather than 100% necessary. This is often done to attract top talent, make a splash, or simply enjoy the success of securing funding, but no matter the reason, it still negatively affects your bottom line when it’s done in excess. 

3. Underestimating expenses

Expenses can easily sneak up on SaaS businesses, especially when different people are in charge of managing different expenses, or when expenses that made sense in the very beginning don’t scale effectively as your business grows. If they’re not properly managed, common expenses like software, payroll, office supplies, and office rent can easily grow faster than you can keep up with and create a cash flow bottleneck—especially if your budgeting doesn’t account for months of slow growth or low sales.

This problem is especially common for founders and companies who are just starting out and have limited experience managing business operations. 

4. Miscalculating time to profit and CAC payback

Your CAC (customer acquisition cost) payback is a calculation that describes how many months it takes to recoup the costs associated with acquiring a customer. It can be derived from this formula:

Your CAC payback period can be determined by dividing your CAC (customer acquisition cost) by the result of your MRR (customer's monthly recurring revenue) minus your ACS (average cost of service).

One very common mistake that can severely restrict SaaS cash flow is miscalculating how long it will take to generate a profit or pay back your CAC. Many early-stage companies believe that their CAC payback period will be shorter than it is, leading them to anticipate making a profit much earlier than they do. 

On average, a startup takes around 12 months to recoup customer acquisition costs, with many taking as long as 15 to 18 months. This is much longer than the 5-7 month average of high-performing, established SaaS companies startup founders may be comparing themselves to. SaaS companies may also underestimate customer churn rates and how those impact CAC payback, leading to burning up more cash than they budgeted for. 

Because this calculation is so important to your finances, wrongly assessing time to profit and CAC payback can have a ripple effect on a variety of other business spending decisions and growth forecasts. In some cases, the miscalculation can be so off-base that it puts you in the red. 

5. Having a “deal with it later” mentality to finances

Many early-stage SaaS companies don’t have formal processes with accounting or finance, or if they do, they’re very basic and don’t account for the distant future or all the factors that may affect a company’s finances. Early-stage companies also tend to be incredibly focused on growing as fast as possible and collecting as much funding as they can. 

This can lead to a “deal with it later” mentality toward finances, where founders push aside figuring out the details of how and when they’ll use funding or pay back costs or debts. Companies may take on software, payroll, and other expenses that don’t currently make sense with their budget because they assume they can figure it out later once they grow more and generate more revenue.

This approach is a recipe for disaster and can lead to many sub-optimal scenarios, including giving up too much equity to investors or needing to achieve impossible revenue goals just to break even. In a worst-case scenario, it can cause the company to fail.

6. Being too flexible with payments

SaaS companies usually aim to convert high-value annual contracts, but many early-stage companies simply can’t afford to focus on getting a few big deals from a small customer base. The revenue is too unstable and difficult to get, and only having a few customers (no matter how big they are) isn’t very impressive to investors. 

Desperate to get prospects to buy, startups will offer huge discounts, even if it comes at a significant financial loss or doesn’t make sense with their budget. Deals of 50% off or more, offers to let customers pay later, or selling software in cheaper monthly payments are all excellent ways to increase conversions, but if they don’t allow for adequate cash flow, you might be digging yourself into a deeper hole than if you never made a sale at all.

Strategies to increase cash flow and facilitate SaaS scaling

So if you’re in a position where you’re trying to grow your business but you’ve been trapped by one of these cash flow bottlenecks, what should you do? How do you break free from making just enough to pay your expenses and start getting enough capital to focus on growth initiatives?

Because SaaS companies that are in these bottlenecks can’t simply make more money from investing in new initiatives, they usually have to get creative with re-budgeting or redirecting what they already have. Here are the pros and cons of the most common strategies SaaS companies use to increase cash flow and improve their cash management

Cutting expenses

Cutting expenses is one of the most obvious and effective ways to increase cash flow, but it also needs to be done very carefully—not only are your financials at stake, but your reputation is too.

Abruptly ending contracts with vendors, laying off large amounts of employees, or downsizing your office can give the impression that the company is unstable or poorly managed, and ruin future relationships within the industry. If you cut expenses too deeply or too recklessly, you’re also very likely to get rid of something you needed more than you thought—such as a top-performing employee, software an entire department relies on, or a marketing initiative that was generating a huge portion of converting leads.

Additionally, if the company's financial problems are rooted in a fundamental issue with budgeting or unrealistic profit expectations, cutting expenses will only work as a band-aid solution. If you do cut expenses, you need to do it carefully and thoughtfully and look at your financial picture as a whole to ensure unnecessary expenses truly are the root of your problem. 

Expanding your customer base

Expanding your business to include more potential customers can be done by changing your product, loosening your criteria for qualified leads, changing your pricing, changing your marketing, or a host of other tweaks. Many companies have success with this method, and some even stumble upon their true niche by reassessing their audience, product, and business approach.

However, expanding your customer base and entering new markets can also lead to a scattered and ineffective business model that can hurt you in the long run. Many companies become too generalist or target audiences that don’t truly make sense with their product, and they end up with an unspecialized business that doesn’t have a solid vision or pain point to cure. It can also lead to internal confusion and disorganization within your company.

Seeking outside funding

​​Raising funds from outside sources like VCs or loans can provide a much-needed injection of cash to cover operational expenses, close a temporary cash flow gap, and accelerate growth. But it also comes with downsides. VC funding means relinquishing equity and control over your company and can introduce tension further down the road if you disagree on the company’s direction. And of course, loans require repayment and sometimes have unfavorable interest terms.

While it’s normal to finance your SaaS company with investors and debt, it’s best to minimize the reliance on outside funding whenever possible. Like cutting expenses, if your company has deeper issues with its business model or financial projections, outside funding may only be a temporary solution, or can even make the situation worse. If you need more funding in between regular funding rounds, it’s best to assess your finances first and choose non-dilutive options that don’t impact ownership. 

Conduct a deep financial assessment 

Whenever you encounter any blockage in your SaaS cash flow, the best course of action is to conduct a thorough financial assessment. This should be done in conjunction with any other approach and is the best place to start before making any other decisions. 

A financial assessment will provide valuable insights into your company's finances by taking a deep dive into all the relevant factors, including cash flow, revenue, expenses, and debt. This will help you get a clear picture of your company’s financial health and identify areas where you can cut costs, increase revenue, and improve efficiency. It will also help you identify if there are any serious underlying problems in your finances, such as a pattern of inaccurately assessing spending in a certain category or a technical error in your numbers. 

While you can get an outside accountant to conduct a one-time assessment, it’s highly recommended to hire permanent top talent in your finance and accounting teams to ensure you can stay on top of your finances in the long term. These teams can help create and manage financial essentials such as creating annual budget processes

How BNPL can help you increase cash flow to grow and scale your business

One solution that could help you secure more revenue and access more cash without giving up equity, changing anything major about your business processes, altering your product, or cutting expenses is buy now, pay later (BNPL).

BNPL solutions have gained popularity in recent years in the B2C sector for the benefits they bring to both vendors and buyers, and they’ve recently picked up steam in the B2B space for many of the same reasons. They work by allowing vendors to get paid upfront for the full product value or annual contract value, while customers get to pay in comfortable quarterly or annual installments.

Although BNPL isn’t a silver bullet to solve all your financial problems, it can significantly help with generating more revenue and increasing cash flow, which could be just the boost your business needs to get out of the SaaS scaling catch-22 and into the next level of growth. Here are 3 key benefits a B2B BNPL solution brings that can help you cure a cash flow bottleneck. 

Increase conversions and customer base—without sacrificing ACV

B2B BNPL can help expand your customer pool and increase conversions by making your products more affordable without compromising your annual contract value (ACV) or customer lifetime value (LTV)—sacrifices you would typically have to make if you offered short-term contracts.

This can be a great win-win for companies that are losing revenue from offering steep discounts or having revenue trickle in slowly from offering self-made installment plans. By offering BNPL as a payment option, you can more easily convert customers who are hesitant about paying a full annual contract upfront. You can also attract new customers who may not be able to afford your product otherwise, increasing your total potential customer pool. 

Increase your immediate access to cash

By allowing you to enjoy both immediate access to cash from high-value deals and an increase in conversions from allowing customers to pay in installments, BNPL for B2B gives you more cash in your pocket. 

This cash can be used right away to invest in scaling or pay for overhead and necessary expenses, which can be crucial to solving both short-term and long-term cash flow problems. It can also help you avoid giving up equity to venture capitalists, cutting expenses you can’t afford to lose, or making other decisions you’ll regret just to secure the cash necessary to survive.

Give you a reliable ARR

Since BNPL secures high-value, long-term contracts without the long-term financial commitment for customers, vendors get to receive a reliable annual recurring revenue (ARR) from customers who behave predictably and are less likely to churn.

Customers will reliably pay their installments while vendors reliably get paid upfront, making it easy to predict your revenue and plan for the future. With a more predictable revenue stream, you can make financial planning and budgeting easier and more effective. You can also use predictable revenue as leverage to secure funding from financiers like bank loans or venture capital.

Overcome the catch-22 of SaaS scaling and increase cash flow with Capchase Pay

If you're struggling with scaling your SaaS company due to cash flow issues and are caught in a lose-lose paradox, a B2B BNPL solution like Capchase Pay can help.

Capchase Pay is a B2B BNPL solution built specifically for SaaS companies that sell in high-value long-term contracts (or want to pivot in that direction) and need help managing their cash flow and scaling effectively. Capchase Pay can easily be integrated into your sales process and is compatible with many popular sales CRMs such as Salesforce and Hubspot. By using Capchase pay, you can:

  • Close more high-value deals faster.
  • Make your revenue more predictable.
  • Increase your conversions and potential customer pool.
  • Give you more immediate access to cash.

For example, using Capchase Pay, B2B lead generation company CIENCE was able to boost their total revenue and get the cash they needed to scale. In just one month, CIENCE was able to: 

  • Halve their sales cycle from 4 weeks to just 2 weeks.
  • Generate $3.7 million in pipeline.
  • Increase conversion rates on high-value deals from single digits to 50+.
  • Pivot to a more predictable revenue cycle.

So if you’re ready to overcome SaaS cash flow issues and grow and scale your business without overhauling your current processes, try Capchase Pay now. You can learn more or sign up here, or by scheduling a chat with us sometime this week.