How SAAS companies get burned by exchange rates 🔥
Seth Phillips | CEO | Bound
We 💜 finance teams from tech companies
We spend a lot of time here at Bound talking with finance teams from venture-backed tech companies.
Like most of the work conversations you probably have, our conversations follow a general outline like this:
“Hey, Where you calling in from in the world?”
[insert your favourite location].
Oh cool, my cousin lived there for a few years. She always said nice things.
…… Wait for it…… here comes the obligatory weather comment…
“Well, you’ve got better weather than us right now. I’d switch [weather-related complaint] for your [generic weather compliment that is, at best, loosely accurate].”
Then the conversation turns to foreign cash flows–which some people might find boring, but we get pretty excited about here at Bound. After all, this is what we do.
Why these finance teams talk about Bound
Finance teams at growth-stage tech companies use Bound’s app to take foreign cash flows that normally bounce around with exchange rates and make them more stable and predictable.
Classic use-cases for using Bound:
A company has relatively predictable foreign revenues streaming into the business and they use their bank or an online currency exchange (Wise, Revolut, Airwallex, etc. etc.) or their Payments Services Provider to exchange currencies at spot rates of the day.
A company has relatively predictable foreign costs streaming out of the business for foreign operations, and they use those same providers to buy those foreign currencies as the need arises each month.
Companies with these use-cases, use Bound’s technology to make these foreign cash flow streams more stable and predictable almost overnight.
How exchange rates can hurt SAAS companies 🔥
One situation that comes up a lot with SAAS companies is the headache of foreign revenue contracts. Here’s an example of how exchange rates can potentially burn saas companies with a lot of international customers.
Let’s pretend we’re a UK-based SAAS company with European customers. We report our finances in GBP.
This is a fictional example roughly based on 2022 and 2023, but also includes simulated exchange rates into the future.
We invoice monthly in arrears and recognize revenue evenly over the contract.
We sign a new contract with a new customer. Yeah!
European customers don’t like paying in GBP, so we price European customers in EUR.
The new contract is worth EUR 25,000/month for 24 months–EUR 600,000 total. Let’s pretend we sign the contract in Jan of 2023. The GBP/EUR exchange rate is about 1.125 at the time of contract signing. That’s roughly where the rate was for the first half of 2023. We’ll expect GBP 22,223.80 per month in revenue.
Based on that rate, the sales team just booked GBP 533,371.26 . Nice work team!
THE FIRST INVOICE
30 days later, we invoice the customer EUR 25,000 and record our GBP 22,223.80 in revenue.
Of course, over the course of the month the exchange rate didn’t stay perfectly stable. We’ll pretend the GBP/EUR rate moved a little. Let’s say it’s now 1.127. Not a big deal, GBP 22,178.85. Whatever. GBP 44.95 isn’t a big deal. I can just write down our revenue a little, take a small currency loss or maybe I’ll just shrug this off.
THE PAINFUL GBP RALLY
But now let’s run a GBP-strengthening scenario for the remaining 23-months. At the time of writing, in early December 2024, GBP/EUR is up to 1.17. (This is mostly the true story of GBP/EUR over 2023)
I’ve also thrown historic GBP/EUR data into a statistical rate simulator and told it to run a realistic GBP-strengthening scenario.
Let’s see how our company does here for the rest of the year.
So, that GBP 44.95 problem in the first month, that we brushed past, ended up being a GBP 63,525.13 problem over the course of the contract. That figure is harder to ignore, especially when you figure we have 50 customers with similar contracts.
If the same scenario with all 50 of our European customers, we’re looking at currency losses or revenue write downs in the ballpark of GBP 3,000,000. And remember, currency losses aren’t just paper losses. This has a real impact to our GBP cash flow.
THE MESSY RENEWAL
One last problem. The renewal. The rate at renewal time was all the way up to 1.19.
The customer is happy and wants to renew at EUR 25,000/month for another 24 months. Seems great, but that’s only going to be GBP 504,201.68 at this new exchange rate.
So, I need to fight for a 6% price increase just to stay steady with the figures from our last contract or I realize revenue contraction from a happy customer. ;(
Again, multiply that by 50 European customers and I’ve got a material renewal problem to deal with.
We love this sh*t, so you don’t have to 😉
These are the types of problems that Bound helps SAAS-companies deal with. Reach out to see if you can make your foreign cash flows more stable and predictable.