The graph on the left shows how new monthly bookings increase, and how churn increases over time. The graph on the right shows MRR monthly recurring revenue, which increases each month due to new bookings and decreases due to churn. For experienced SaaS business people, this MRR graph may be obvious, but for those who are new to SaaS, it is necessary to clearly understand the three different components of MRR.
Cash flow trough
Now let's look at the timing of sales expenses for a new salesperson and how this can be problematic since revenue takes a while to build:
SaaS-Cash-Flow-Trough2
In the left graph, we can see that spending has remained roughly philippines mobile database constant, but MRR has slowly grown over time. This creates the problem of SaaS cash flow, which is the main topic of this blog post.
In the chart on the right, we can see that it takes 11 months for a new salesperson to break even and start contributing positively to the company’s bottom line. It’s very important to note that this number will vary widely between different SaaS businesses, depending on the many variables used in the model. This is a little later than the crossover point in the chart on the left, because the model shows a gross margin of 80% after deducting the cost of serving each customer.
Now let's look at how these expenses and gross profit stack up:
SaaS-Cash-Flow-Trough3
The above chart clearly shows the size of the SaaS cash flow trough $110,000 in this case and the time it takes to recoup the investment 23 months in this case.