Module I· Cash Flow Statement ConstructionAdvanced
Question
How does CFO differ structurally between a classic industrial and a SaaS company?
Answer
Mechanics
The OCF structure differs structurally between classic industrials and SaaS business models:
| Aspect | Classic industrial (specialty chemicals) | SaaS (MidCap Software Inc) |
|---|---|---|
| Net income | a solid base | often low or negative (R&D + S&M investments) |
| D&A | high (capex-intensive) | moderate (little PP&E) |
| ΔNWC | seasonally volatile, low on average | dominated by Δ deferred revenue (subscription prepayments) |
| SBC | typically not material | a large add-back |
| OCF profile | close to net income + D&A | OCF >> net income because of the subscription model |
Deep diveShow more details
Examples
Industrial
```
NI 100 + D&A 80 + ΔNWC −20 = OCF 160
```
SaaS
```
NI 0 + D&A 30 + SBC 50 + Δ deferred revenue +60 + Δ AR −20 = OCF 120
```
Pitch tip
In a SaaS valuation, do NOT take reported FCF — adjust for (a) SBC cost and (b) deferred-revenue growth that isn't scalable. 'Cash flow normalized for SBC and steady-state deferred revenue growth' is the standard adjustment for institutional SaaS investors like Vista or Thoma Bravo.