Cash conversion cycle for SaaS companies
How would you calculate the cash conversion cycle for SaaS companies? They don’t hold inventory so I’m assuming their CCC isn’t just days sales outstanding - days payable outstanding
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Depends whether you are looking at it on a cash EBITDA basis or not. If you are talking cash EBITDA (EBITDA + change in deferred revenue) then it would be as you described. DSO and DPO. If you are looking at it on a normal EBITDA basis then you could include deferred revenue, but I've never seen this before.
I wasn't aware of a cash ebitda before but this makes a lot of sense to include deferred revenue for saas companies. So I can just add the change in deferred revenue on the CFS to EBITDA just as I would with D&A? Is there anything else out of the ordinary that typically gets added to cash ebitda?
Change in deferred revenue is the big one. Reason being that for most SAAS companies you collect all payment upfront for an annual subscription, resulting in higher cash collection than reported revenue equal to the difference in change in deferred revenue. If the business stopped growing and kept billing the same amount, reported revenue would eventually catch up to the current cash collection rate so it's not just some baloney adjustment. Rather it represents the true cash revenue collection rate of the company.
Other adjustments are just your typical non cash and non recurring items.
Yeah that makes a lot of sense. So do people really focus that much on revenue for SaaS companies or is the main focus really billings? Would it be better to base my multiples off of Billings & EBITDA+Deferred Revenue rather than traditional I/S metrics (rev, ebit, etc.)
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