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Evolving from Excel for SaaS Financial and Metrics Reporting - with Ali Rizvi Founder and CEO, TrueRev
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- [00:01]
A
Hello, I'm Ray Reich, founder and CEO of RevOps Squared and your host of the Metrics that Measure up podcast. We talk to a wide variety of B2B SaaS and Cloud Thought leaders, executives, investors and people just like you to discuss the metrics and benchmarks they use to make metrics informed decisions. Now, on to today's show. Welcome to today's episode of the Metrics. At Major Podcast Today, we are joined by Ali Rizvi, the founder and CEO of TrueRef. Today we'll be covering three main topics with Ali. Number one, signs that excel is no longer the right tool for SaaS revenue recognition. Second, ASC606, the good, the bad and the ugly. And third, the top SaaS metrics for SaaS companies less than 5 million ARR. So with that, let's take a moment to give a brief overview of your journey, Ali, to becoming a guest on the Metrics that Measure up podcast. Hi, Ray.
- [01:16]
B
Hey, thanks for inviting me. Glad to be here. Quick intro about my background and how I got here. I guess really I'll start quickly from sort of inception, which was, you know, after business school, I started my professional career at Ernst and Young here in the San Jose, California in Silicon Valley, where I was primarily working in the audit practice focused on tech companies and as a financial statement auditor. I mean, the primary risk area we always focused on, at least when I went in and looked at companies, was on revenue, which then was around revrec, deferred revenue, et cetera. And it was always, the risk was always that a company had potentially misstated their revenue, usually overstating revenue. So that's the risk that we're after. Right. So, you know, after eny, as a, as a fractional working as a fractional cfo, I continue to work with a lot of tech companies and it was primarily helping them around getting their Rev rec policy done correctly. And in fact, I'm just going to share one story. I had one tech client at the time, this was a few years ago, prior to True Rev, and it was the reason I started True Rev, by the way. It was a gaming SaaS company. It's now a unicorn. It was being backed by a large tier 1 VC and they wanted to make sure before they put their money in that the, you know, the company had a proper audit and got essentially around their revenue. So we were brought in, we looked at their revenue and I'll tell you just what we found. Tens of thousands of rows in a spreadsheet, multiple worksheets, formulas everywhere, macros, Pivots, you name it, errors throughout billing events being exported from their accounting system and stuck inside the same spreadsheet. And it literally took 10 minutes just to open the damn thing. It was crazy. Literally, I would hit open and I'd go get a coffee. But of course, we found that revenue was misstated, and it took nearly six months of us just fixing it all. But it was really that crystallized for me that this is a problem that exists in a lot of companies, not just the smallest ones, but larger ones. And I had to create software to help address this problem.
- [03:16]
A
Well, thank you for the introduction. And you kind of almost answered one of the first topics I want to discuss with you, but you talked about it as an auditor and someone who really understands revenue recognition and reporting. So let me flip it to those members of the audience who, you know, they got their QuickBooks online, they've got Excel, maybe they've got 500,000 to a million dollars of ARR, and they don't know what they don't know. So what are some of the common signs that you've seen that a SaaS company founder or their head of finance should say, well, maybe QuickBooks and Excel really isn't meeting the challenge of what I need to do for revenue recognition?
- [03:56]
B
Yeah. You know, for, you know, companies that are kind of at that $1 million ARR stage, QuickBooks tends not to be the big issue there. You know, QuickBooks is really. It's just a general ledger. It's your accounting system. It simply just records what you tell it to record. I mean, the issue really is it's around how revenue is being calculated. That's kind of the big one there. It's not just how it's being calculated, it's where is it being calculated and who's doing the calculations. For those companies, that's usually where it is. And the reason they have that problem, to be honest, is in terms of the who is doing it is. You know, when you're just trying to grow, your growth is typically the game. I want to keep my costs low, and I just want to grow, so I'll hack my way through anything. And it's often they don't have the right resources in place and. Or the right potential folks that they can rely on to help them to understand one, how to record revenue and then how to report revenue. That's what I see as a problem. It's not so much the QuickBooks element, it's who's doing it, where they're doing it, which tends to be Excel Come on, Ali.
- [05:02]
A
Let's say I do mostly 10 to 20,000 ACV agreements and I sign a $12,000 agreement. Okay, my Excel says 12,000 divided by 12, that's a thousand. You know, of recognized revenue, or I do 25,000, I give it 25 by 12 and I know that it's 2,083. What makes it that hard to just say I take my annual agreement and divide it by 12?
- [05:26]
B
Yeah, I love that. I mean, you've nailed, by the way, the, one of the big problems that we see all the time. It's a lot of companies, first of all, don't even do that. I mean, you just come up with something which is pretty simple. But a lot of them don't. They use cash based accounting. So I've come across countless companies where they say, hey, look, we know we're doing this wrong. We send out an invoice, we get the payment, we just recorded all this revenue. And they're just doing it because nobody's really asking for anything of them at that point. The problem really surfaces the moment somebody says, hey, can you tell me what your actual MRR is? And then they're left scrambling. The other issue too is sometimes it's not as simple as dividing your ACV by 12. I mean, let's say, for example, you sell some SaaS and you also sell some professional services. Well, first of all, both of those don't go in your MRR. So that's a SaaS metric. And by the way, you could divide all those, you know, the entire deal by 12. But really, should, shouldn't you separate the professional services, maybe recognize that all at once? Or maybe should you spread that for the first year over the 12 months along with the SAS? But then what about the second year? There's no professional service at the time. Then how do you deal with that? These are small sort of issues with the seem small at the time, but they end up leading to numbers that are not accurate.
- [06:43]
A
And biggest issue around that. Is it the filing of my taxes to make sure I have the right things on my income statement? Is it mostly for investors? What's the real catalyst to make sure I get this rev rec right, Ali? Especially as a small company, you know, it's both.
- [07:00]
B
By the way. I mean, I think certainly from a tax standpoint, you know, to file your taxes, you have to get your revenue accurate. But I think, you know, where I've seen it surface, you know, for the most part is when somebody is asking for either it's your revenue, your, you Know your GAAP revenue or your SaaS metrics and let's just split those up for just a second. But in terms of your GAAP revenue, you know, there's always external constituents that are asking for it. Say for example, you're looking to raise some funds, some money and you know your investors are going to ask for what is your revenue. First of all, what was your revenue growth? You know, month over month, quarter over quarter, year over year. So just getting it right for those purposes so you can confidently tell external stakeholders or constituents accurate numbers. So it starts really surfacing, these problems start surfacing once you crossed into a certain amount of revenue and, and a growth where others are now looking to see the health of the business. And you have to be able to accurately and confidently report the health of the business and it starts with revenue.
- [08:03]
A
Well, let me ask though, especially once again for those smaller companies, let's say I'm under 2 million, don't I just hire an accountant who's got SaaS experience and they take care of all this for me? Why would I need to kind of know about it or buy software to actually manage it for me at that small size?
- [08:22]
B
You know, at the small. Again at the small size. A lot of times what we see are companies that are just getting by because nobody is asking for it. And that's when you're really small. But as you cross over 1 million ARR, I mean you've got something happening there, right? Most likely you're kind of hitting product market fit. Hopefully you're starting to see some growth, you're getting some interest. If you haven't already raised money, you're getting some interest and potentially you're going to go out and raise money. It's for all of those reasons the founders and certainly if you're not a business backed or accounting, you know, you have an accounting background as a founder, you have to know your own numbers. I mean it's just, it's knowing your business and one of those most important things, you have to know your numbers, including cash and, and all that. But to hire somebody to come in and do it, you can certainly do that for sure. I mean a lot, a lot of companies do that. They, they'll hire a good SaaS accountant, be able to help them do this. The problem though is, is that if the SaaS accountant comes in and knows what they're doing, which, which is fantastic, sets everything up in some sort of manual way again, you're now spending time and money to manually manage this. And can you imagine if you have 10 deals, putting them on a cell, nope, no problem. I mean it's totally manageable, doable for most, but if you start getting the very complex deals and that number of 10 starts growing and now you're at 50 or you're at a hundred or more and now you've got this Excel file is starting to fill up and somebody has to manage it, it just starts becoming to be a problem. And we see this time and time and time again with companies that we work with.
- [09:55]
A
So we're going to pivot to metrics in just a minute which aren't GAAP revenue based often, but you're a first time founder and you got to understand all these acronyms, cac, nr, ndr, cac, Payback Period. And then someone says, well, are you adhering to ASC 606? It's like, what is ASC 606? And for you and me, Ali, this was supposed to make things easier from a revenue recognition perspective. Do you think ASC6,06 has helped us as entrepreneurs or has it made our lives more difficult in financial reporting?
- [10:32]
B
I mean, that's a great question. ASC606 is, you know, it's an accounting standard. It deals with contracts with customers and you know, plainly said it guides you on how you should be recognizing your revenue or how companies should be recognizing their revenue. And so let me just dig into it. I mean, at the, at the earliest stage of a company, it really is, you know, ignorance is bliss, to be honest. Right. You know, if I don't know about it and I, you know, don't, don't really pay attention to it, it's not going to really get me into too much trouble. I'll just keep doing what I'm doing. Status quo. But I mean, you think about it. Have you ever been stopped for speeding and thinking you're in a 65 zone when in fact it was a 55 zone, you know, I, I mean you're going to get a ticket. You can't say, hey, I didn't know. And so when does that happen? You know, when, when does kind of getting caught, so to speak, happen? Well, again, it happens when you have been asked by some external constituent whether it's obviously from a tax perspective, you have to report correct revenue for tax purposes. But again, if you're raising money or if you have an external constituent, a bank, maybe a lender or other type of stakeholder who's asking for your correct revenue numbers under gaap, well then you have to know and you have to report them under gap. Here's, here's another place that it's insidious and a lot of founders don't realize this, but they're, you know, in the earliest days you're signing all sorts of deals, right? You're, maybe you're, you're renting office space, you're signing an office space. And in that, in that rental, landlord, rental agreement, there's probably a provision in there somewhere that says, we'd like to be able to see your financials in some cadence, quarterly, annual or whatever. And those financials are prepared using gaap. Another one, which is you're looking for a loan from a bank and you get a loan or a line of credit within those line of credit documents, I can guarantee you there's going to be some provision that'll say we'd like to see your financials on some sort of regular basis prepared using gap. That's where it becomes important. So even though you may not think it's that important, you're doing all sorts of things to run your business where you have a reporting requirement to report your revenue and your numbers under gaap. Does that kind of make sense?
- [12:41]
A
Makes total sense. So, okay, now I've got my GAAP revenue, deferred revenue, I've got that under control and now I'm looking to do my seed or my Series A round. And I know I need to be ready with all these SaaS metrics that investors are looking at, you know, my CAC payback period or my net revenue retention. So when we're looking at that kind of 1 to 2 million looking for doing, maybe it's their series A. Are those two or three metrics ali that you're like, you really need to have your hands on these metrics and really understand them. And then we're going to talk about what metrics become more important as you scale to 5, 10 and above.
- [13:22]
B
Yeah, I mean, for the earliest, you know, the earliest, earliest, you know, companies that 1 million ARR, maybe 2 1/2 ish ARR range. It slightly depends on your business model, but MRR and error are probably the two most important ARR. Certainly if you're selling annual contracts, you need to know that if you're doing more monthly than mrr, of course becomes very, very important. That's the really the SaaS metric that I see a lot at those earliest stage companies. The other metrics, now they may not be SaaS, but they're financial metrics that you see at these companies that are highly important are cash Burn your cash Runway, your cash outdate, you know, being hyper focused on that. Typically for companies at that early stage, there's other metrics that a little bit harder to measure, but again, really important because they go to how much cash that you're burning. Sales and marketing efficiency metrics. Now, again, these are harder to measure, but being able to measure what you're spending from sales and marketing efforts to win business and then what kind of return you're generating on those dollars spent is really, really important. And then another one, which, you know, we see a lot is what is my value of my lead funnel by stage? That's another one. Now again, I get those aren't purely kind of on a SaaS basis, but for those really early stage companies, the 1 million to 2 and a half, maybe 3 million companies where MRR and ARR become your SaaS metrics, that become very important. All of those other ones just to monitor the health of your business and whether you're growing and how well you're growing and spending your money are also really important.
- [14:55]
A
Holly, I know that when you founded True Rev, it was really to help with that revenue recognition, deferred revenue reporting, but you've expanded that into SaaS metrics. So are there some common challenges, you see, where these earlier stage companies are really having a hard time with how to calculate or even where do they find the right input data to calculate these SAS metrics? What are those big challenges?
- [15:19]
B
You know, the challenge is that there really is no consistency. It's hard to find consistency. Now there's, let me just caveat that a little bit. The consistency in calculations is a lot better today than it was five years ago. Right? Because now there's a lot of folks that are measuring these metrics. They're now reviewing themselves against their peers or peer companies. There's a lot more knowledge and articles that have been written about how to calculate certain SaaS metrics, but there are still a lot of, a lot of nuances. I mean, in fact, I was on a call with one of our customers earlier today and just for them to understand and let me just bore you with kind of one, one example, you know, real life example. So, you know, here's a company that sells annual deals and they want to measure their MRR ARR from these deals. And often their deals start mid month, right? So say, for example, starts January 15th and ends the following January, also mid month. Now how do you calculate MRR on that? How do you calculate MRR in the first month? Let's just make it Simple. Let's say it's a $12,000 deal, right? You started January mid month. Is it 12,000 divided by 12? Is it? Is it what did you actually get 1,000 in MRR in January in that month? And if not, then what do you record for mrr? Do you do it a half month? Did you only get 500? Well, no, because your actual recurring revenue from that contract, if you do an easy one, 12,000 divided by 12 is one, you should be getting 1,000 MRR. So I mean, just think of that like companies stumble along those things and there you go. I don't know, you probably have some insights here, Ollie.
- [16:58]
A
Even though that's 1000rrr, that's only $500 of GAAP revenue, Right?
- [17:04]
B
Exactly. There you go.
- [17:06]
A
That's a very good, simple approach. It's funny, you know, me and some other people founded the SAS Metric Standards Board and, and that exact question just came to us two days ago. Well, if we do it mid month deal, what do we put into our MOR and ARR for January versus February versus January of next year?
- [17:25]
B
Yep.
- [17:26]
A
So it's exactly a perfect example. So here's something simple. It's ARR. Mr. But what are some of those SaaS metrics that you find people really struggle with as they start to scale that they don't understand the calculation formula or it's just hard to get these source data?
- [17:46]
B
Oh gosh. Yeah. So let's, let's just hone in on a couple. But one, for example is cost of customer acquisition. Right. Just to try and understand that calculation, there's so much variability on how companies will calculate cost of customer acquisition. Right. Simply put, you're trying to determine how much are you spending to acquire customers. I mean that's, that's conceptually, that's what it is. Right. So what do you include in the numerator? What do you include in the denominator of that calculation? I mean, should you include one time conference costs, you know, that you, you know, as part of your marketing program, what have you sponsor a newsletter, should you include that in your cost of customer acquisition? What have you sponsored that newsletter in quarter one, but you don't do it again in quarter two, so you can see how this will start bumping around. And so you know, what we've seen is so much variability. You know, you have some companies that include everything, the whole kitchen sink, they want to throw every sales and marketing dollar that they can into their cost of customer acquisition calculation, whereas others will be more selective. So just the consistency in that calculation is missing.
- [18:50]
A
So Ali, what this tells me is you've got a software company. True rev, but you can't just throw the software in there and say go at it. It sounds like your consulting advice and implementation might be just as valuable upfront as a software. And that's my assumption. What say you?
- [19:06]
B
Yeah, you know, we, we don't charge for consulting, although maybe not a bad idea.
- [19:12]
A
Right.
- [19:12]
B
But you know, we, you know, we just want to help our customers. You know, the ones that come on, we have a lot of these conversations with them that we try to help them improve their processes. But one thing our software definitely does, it enables you, I mean just the, the example you and I brought up about this, you know, mid month mrr, how do you calculate that? So our software can handle that. We've, we've come up with different ways that if you want to calculate your MRR, you know, using 13 months, if you want to spread it over 13, if you want to do it over 12, if you want to do it exact, if you want to do it in different ways, there's ways. Now the softW software can, can do it because everyone has kind of different ways that they want to do it and we don't want to force everyone down, you know, one, one path. So the software helps. But going back to things like CAC or another thing that we didn't touch upon is gross margins. So there's another one that, you know, it, there's variability all, all over the place. So we try to advise our customers when they come in and they have those questions. We certainly try to help them as best.
- [20:10]
A
Here's the last question for you on SaaS metrics. Is there a SaaS metric that you've had prospects or customers say, my investors really want to know this and you're like, man, this SAS metric is so overrated For a company at your stage, is there one that jumps out at you, Ali?
- [20:28]
B
You know, for the earliest, earliest stage companies, I would say gross margin. And when I say early stage, I'm, you know, I'm talking about sort of 1 million to 2 million. Because the thing with their gross margins is often they're all over the place, their hosting costs are potentially insane. They may or may not have anybody that they're charging towards customer success or operations. So gross margins, I think for the earliest stage companies tend to be not as useful just because the variability is significant in those earliest stage companies. I think also as you start maturing kind of on the flip side, as you start crossing that $5 million depending again on your business model. Are you selling annual deals or not? The metric that becomes important is a lot of companies are now measuring committed ARR, so they want to be able to see what's the value of my customers that have committed, that have signed a deal with me and that number starts becoming very important.
- [21:24]
A
I agree with that. I'm going to pivot back to the overrated metric. I'm going to throw one at you and see if you agree with me. When I have a founder who's, you know, 500,000 million, even 2 million AR, but they've only been around for maybe 12 to 24 months, like, well, I have an investor asking me about my customer lifetime value to CAC ratio. I'm like, whoa, whoa, whoa, number one, who's your investor that's looking at cltv with a company that's only had one, maybe no annual renewal processes because then customer lifetime value could be infinite because you don't know what your churn rate is. What say you about that one?
- [22:03]
B
A hundred percent agree. Yeah, yeah. I mean, you know, if you've been around for such a small period, I mean, gosh, even under five years, right. You know, you think about just what you said, even just thinking about CAC in the initial, of course your CAC is going to be massive when you're just out there trying to win one or two customers because all your costs are spent going towards one or two customers, right? So CAC is kind of meaningless in the beginning a little bit again depending on the business model. But for, you know, for most, it's sort of meaningless. And of course customer lifetime value is completely meaningless, you know, if you're sort of less than 3 years old and you know, and I shouldn't say meaningless in such a sort of stark way, but there's other, other metrics that are much more meaningful than, than those at that stage.
- [22:49]
A
You're a SaaS company, you're a CEO. Are there two or three metrics that right now you're looking at every month or every quarter to really gauge the health of your business growth?
- [23:01]
B
We're hyper focused on our ARR and our retention, our AR retention. So net promoter score, which we haven't really touched upon. So that's one that we're starting to measure more and more as we're growing in terms of customer base. But just looking at the health of our customers, our renewal rates, again, which goes back to retention and just preserving our ARR. So those from a SaaS metric standpoint, we're just hyper focused on those then the other ones that we look at a lot. Now I'm going to the cost side which is marketing spend. How much are we spending on marketing and sales in order to acquire those customers? And I sort of touched upon that earlier but it's super, super important for us because right now we're early stage and every dollar that we spend towards some type of either marketing or sales makes a huge difference on our top line.
- [23:49]
A
Or you're out there, you're a student of the industry. Is there a CEO or company that you think is a must follow for fellow entrepreneurs today?
- [23:58]
B
Well, I mean for sake of entertainment, who's not following Elon Musk these days, right?
- [24:04]
A
Those people who don't like what he's doing at Twitter. Those are the people not following him.
- [24:08]
B
Yeah, yeah, well, but more seriously, I mean for me personally, I love the story of HubSpot. I follow them personally. I, I love what the company has done. I, I love their leadership and some of the vision that they brought in terms of their company and their product. I mean as an example, you know we, we use HubSpot by the way but this is the whole concept around plg like product led growth and then how that mixes in with enterprise sales. You know, they're so super user focused. They try to make their product as easy as possible even though it's a big, big, huge platform. And I just think that's for me HubSpot, it's a great playbook that I think a lot of founders can learn from.
- [24:47]
A
That's a great one. I was actually looking at a report just Yesterday that showed HubSpot's retention or the inverse churn when they were 5 million, when they were 500 million and when they were a billion. And the one thing that they focused on with laser like accuracy was churn. And as soon as they got their churn from less than it was almost 30% to like 12 to 15%, their profitability went through the roof. Alex. So that's a good one second, what tool not your own should every SaaS company be using early in their journey?
- [25:23]
B
Other than HubSpot?
- [25:25]
A
Other than HubSpot.
- [25:26]
B
Yeah, just, you know, just most recently I've got to say what, what I've tried now is chat GPT for it's, it's, it's great and you probably, maybe you've heard that right, the news all over the place, but it's pretty cool. I, I've curated just some content using it and you know what would take me or Maybe a content writer, you know, I don't know. A couple of hours to sort of brainstorm and put pen to paper. I was able to do it in about 25 seconds with ChatGPT. And then you take that framework and then you can create something cool from it. So I love that as a tool right now.
- [25:59]
A
That's a great one. And very thematical. And last question, here you are a B2B company founder. Someone just graduated college and they want to be a B2B company founder someday. What advice you give them right now as they begin their career journey?
- [26:15]
B
You know, that's. That's a good one. And somebody who's looking to be a founder and doesn't even have to be B2B to be honest. I mean, I think it's a cliche, but it's so true. It takes a village. I would say. Build relationships, strengthen relationships, develop a community of people you trust. Don't wait. It's never too late to do that. To be honest. You can't build anything alone. I made the mistake of thinking I could do it all myself early on if I just did all the right things, but it never happens that way. And there's examples of solo founders, obviously, that are super successful, but for most of us, you need a team, you need a strong co founder. And then lastly, I would just say it's truly a journey. Again, a little cliche, but it's very true. It's a journey. It's a long one. It's often very lonely. And then lastly, I would say, you know, don't get disheartened. Right? I mean, it's. I think it was like lead singer from REM I think, once said, or is Jeff Bezos said, you know, it takes 10 years to become an overnight success and nothing could be farther from the truth. Perfect.
- [27:19]
A
Well, Holly Rizvi, thank you so much for being a guest on today's episode of the Metrics Measure up podcast.
- [27:26]
B
Yeah, absolutely, Ray, thanks for having me. This was. This was great. Enlightening. Appreciate it.
- [27:30]
A
And to our listening audience, if you're enjoying the conversations we're having on Metrics of Measureup, it would mean the world to us to go ahead and subscribe to the podcast or your favorite podcast app, go ahead and give us that five star rating because it amplifies the reach of this great content and guests like Ali. And thank you so much for listening today. Ali, thank you again for being our guest. Thank you for listening to today's Metrics Measure up podcast. If you would like to learn more about B2B SaaS, metrics and benchmarks, please visit revopsquared. Com.