You need to track more than just revenue when it comes to building a healthy cash flow business.
The reality is, that revenue reports can lie, even unintentionally. Yes, it shows you how many customers you have and how much they spend with you each month, but it really doesn’t show investors how much cash is going into your bank account.
Investors aren’t as interested as they once were to see the revenue of your company. Investors are wanting to look at your accounts receivable metrics to see if your company’s cash collection is effective and you have good cash flow.
Why are these metrics important to investors?
One thing that can’t be lied about or manipulated is the amount of cash in the bank.
Invoices can be sent which creates reported revenue. Whether that money is collected or not, it raises your monthly recurring revenue (MRR). Your MRR is inflated but no money has been sent to you. There are many other ways that your MRR can be artificially inflated.
However, strong cash collection metrics are a sign of happy customers and a healthy management of financials is what investors want to see.
What should you report to investors?
Reporting an accurate picture of your finances to investors is essential. There are 2 main documents that you will need to provide;
- Profit and Loss Statement: You have probably shared this one in the past with investors. This shows the invoices you have sent as revenue alongside all the costs associated with running your business.
- Cash Flow Statement: This statement will include your Cash Collection Ratio (CCR), Days Sale Outstanding (DSO) and billing cohorts. This shows how your cash collections process has grown overtime.
Cash Flow Statement Requirements
You are probably used to reporting revenue metrics like MRR, Annual Recurring Revenue, Average Contract Value (ACV) and Customer Acquisition Cost (CAC) from your profit and loss statement but investors are wanting to look deeper. You are going to need to report these accounts receivable metrics to investors in your cash flow statement as mentioned above.
- Cash collection ratio: You can calculate this ratio by looking at the cash you have collected and divide it by your Monthly Recurring Revenue. This gives you the ratio of reported revenue that you collect in a month.
- Billing Cohorts: These are groups of invoices that you sent out within the same month. Tracking this gives you the ability to compare your cash collection effectiveness each month.
- Days Sales Outstanding (DSO): This is the average amount of days it takes for your invoices to get paid.
Investors will want to see how these numbers have evolved over the years.
Know if your KPIs are on track
Before you share your metrics with investors, you need to have an understanding of what those numbers are going to mean and what exactly to aim for.
Below are a few examples you can use.
Accounts receivable metrics examples
- Days Sales Outstanding (DSO): You should aim to keep your DSO at less than 30 days to keep your invoices becoming overdue.
- Cash Collection Ratio: Have a goal to reach at least a 110% cash collection ratio. This will give your company a longer runway. This also shows your investor that you’re actually collecting more in a month than the revenues you’re reporting.
You’re probably wondering how you achieve this, it’s quite simple. You can collect more cash than the revenues you record when you get paid upfront. Having a portion of your customers on prepaid terms will ensure you have a healthy amount of cash in the bank.
- Billing Cohorts: As you track your billing cohorts, you want to see a positive trend of more invoices being processed and paid in under 30 days. The closer you get to that number the better you will look on paper.
These numbers obviously are subjective and will vary from business to business, but you get the idea.
Staying on top of your cash flow metrics
To stay on top of these reports, you could hire an employee to manage the accounts receivable for your business or you can use a software that automates this whole process for you.
With PencilPay, everything is automated for you. Onboarding customers through our software gives you a signed contract with saved credit card details or direct debit for easy collections. This will dramatically decrease your DSO and also increase your CCR.
Revenue and MMR can be misleading for your investors because of the way numbers can be inflated. However, the cash flow statement never lies and more investors want to see this front and centre before digging into their pockets to hand you cash.
If you’re interested in learning more about Pencil and the power of automation, book in a demo or get in touch with the team here.