Your SaaS dashboard says you’re winning. MRR is up, ARR is climbing, churn looks under control. Yet your bank balance tells a different story, and it’s not subtle.
This mismatch is one of the most common stresses for founders and finance leads. The problem usually isn’t fraud or failure, it’s timing. Revenue on the P&L follows accounting rules, cash in the bank follows payment behaviour, billing mechanics, and a long list of small “leaks” that add up.
This article gives you a practical, repeatable way to reconcile MRR to cash each month, so you can spot where cash is getting stuck (billing, collections, refunds, fees, VAT timing, and working capital) and fix the biggest issue first.
ARR and MRR are not cash, here is why the numbers disagree
ARR and MRR are run-rate metrics. They describe what your contracted or recurring revenue should look like over time, assuming customers stay and billing works as planned.
Your bank balance shows something else: cash that has actually landed, less cash that has left. It’s blunt, but honest.
The gap is caused by accrual accounting. In plain terms:
- Revenue is recognised when you deliver the service, not when you get paid.
- Cash moves when money changes hands, which can be before or after the service month.
That’s why a well-run SaaS company can report strong ARR growth while still burning cash, especially during fast hiring, heavy sales investment, or when billing and collections don’t keep up with bookings.
Common reasons SaaS revenue looks healthy while cash stays low
Here are the usual drivers. Each one is normal on its own, but a few together can make cash feel tight even when ARR looks strong.
- Annual prepay versus monthly pay mix: Annual deals can boost cash upfront, but if most customers pay monthly, cash lags behind growth. The reverse can also confuse people when cash spikes but revenue stays flat because the cash sits in deferred revenue.
- Invoice timing: If you bill in arrears, you recognise revenue now but invoice later. If you bill upfront annually, you invoice now but recognise revenue over time.
- Payment terms: Net 30 or net 60 means revenue today, cash next month or later.
- Failed payments: Card failures and expired cards create “involuntary churn” where ARR looks fine until it suddenly doesn’t, and cash drops immediately.
- Churn and refunds: Revenue might already be recognised for part of a period, but cash can flow out fast via refunds.
- Discounts and credits: ARR can be quoted gross, while cash reflects net receipts after credits or negotiated concessions.
- VAT timing (UK): VAT collected is not your money. It sits on the balance sheet until the VAT return is due. This can make a good month look “cash rich” when you’re really holding VAT for HMRC.
- Payment processor holds and payout timing: Card processors pay out on a delay, and may hold funds in a rolling reserve if disputes rise.
- Chargebacks: A dispute can pull cash back after you thought you’d been paid.
- FX fees and conversion: International receipts can be clipped by conversion spreads and fees, which reduce cash but don’t reduce ARR.
- High upfront costs: Sales commissions, implementation costs, onboarding time, and early hires hit cash now, while revenue is spread over months.
Once you accept that ARR is not cash, the next step is to make the bridge visible and repeatable.
A simple MRR to cash reconciliation you can run each month
You don’t need a complex model to start. You need a consistent monthly routine and clean source data.
Data sources you’ll use:
- Billing platform or subscription system (subscriptions, invoices, credit notes, refunds).
- Payment processor reports (payouts, fees, disputes, reserves).
- Bank statement (actual cash in and out).
- Accounting ledger (revenue, deferred revenue, accounts receivable, VAT control).
Pick one month and treat it as your “clean example”. Reconcile it properly, document the logic, then repeat monthly. The aim is not perfection on day one, it’s a process you can trust.
At a high level, your bridge runs like this:
MRR movement (run-rate) → recognised revenue (P&L) → invoices/billings → cash collected (bank)
Step 1, tie MRR to recognised revenue (and spot revenue recognition traps)
MRR is a run-rate snapshot, not a revenue number. Recognised revenue is what belongs in that month’s P&L under your revenue recognition policy.
To bridge MRR to recognised revenue, check the items that often break the logic:
Plan changes mid-month
Upgrades, downgrades, seat changes, and add-ons create proration. MRR may show the end-of-month state, but recognised revenue must reflect the days on each plan.
Partial periods
New customers rarely start on the first of the month. If your system books a full month of MRR but service started on the 18th, you have a built-in mismatch.
Usage-based charges
Usage revenue is often billed in arrears. You might recognise it based on usage delivered, but invoice and cash arrive later.
Implementation or onboarding fees
Some fees are recognised upfront, some over time, depending on what’s delivered. If your team treats all fees as “extra revenue this month”, you can inflate the P&L and confuse cash expectations.
Annual contracts and deferred revenue (the most important concept)
If a customer pays £12,000 upfront for a year, cash arrives now. Revenue is recognised monthly, often £1,000 per month. The balance sits in deferred revenue, which means “cash received for future service”.
A simple sense check that catches problems early: if cash from annual upfront deals is rising but your deferred revenue balance is flat, something is off in posting or recognition.
Correct revenue recognition isn’t just tidy bookkeeping. It underpins board reporting, investor updates, and diligence. If you can’t explain the bridge from bookings to revenue, confidence drops fast.
Step 2, bridge recognised revenue to invoices and billings
Recognised revenue and invoiced amounts can diverge for legitimate reasons. Your job is to label those reasons so they stop feeling like mystery.
Common causes:
Revenue without an invoice
This happens with prorations, usage accruals, or when a credit is applied without a clean invoice trail. It can also happen when finance “manually journals” revenue but billing data doesn’t match.
Invoices ahead of revenue
Annual upfront invoicing is the classic case. You bill £12,000 now, but only recognise £1,000 this month. The rest is deferred revenue.
Credit notes, write-offs, and goodwill adjustments
A credit note reduces invoices (and often cash expectation) but might not reduce recognised revenue in the same period, depending on timing and policy.
VAT differences (UK)
Your invoices include VAT, but recognised revenue excludes VAT. If you reconcile invoice totals to revenue without stripping VAT, you’ll chase ghosts.
A quick monthly checklist helps:
- Are invoice dates aligned to service periods?
- Do billing cycles match contract terms (monthly, annual, quarterly)?
- Are credit notes approved and coded consistently?
- Are bad debts written off, and is the policy clear?
- Is VAT set up correctly by customer location and tax status?
If this step is messy, cash forecasting becomes guesswork because billings drive collections.
Step 3, bridge invoices to cash collected (the real cash story)
This is where the truth shows up. You can have perfect revenue recognition and invoicing, and still have weak cash if collections are slow or payments fail.
Mechanically, cash collected is shaped by:
Payment terms and customer behaviour
Invoice customers pay on their schedule, not yours. The bigger the customer, the more they treat terms as optional unless you enforce them.
Direct debit versus card
Direct debit often reduces failed payments, but it needs set-up and trust. Card payments are quick but fail often, especially as cards expire or banks tighten checks.
Dunning and retries
A good dunning flow (retries, reminders, account holds) can recover a meaningful chunk of failed payments. A weak one quietly bleeds cash.
Processor payout timing, holds, and reserves
Processors pay out on a delay. Some hold a portion of funds as a reserve. During periods of high disputes, reserves can increase and trap cash.
Refunds, disputes, and chargebacks
A refund is cash out now. A chargeback can remove cash later, plus fees.
A plain-language formula that helps teams align:
Cash in during the month equals invoices paid, minus refunds and processor fees, adjusted for payout timing and any funds held back.
If your bank receipts don’t match “invoices paid” in your billing system, the difference is almost always timing, holds, refunds, or misapplied payments.
The usual culprits, where cash leaks happen in SaaS
Think of your SaaS finance system like a set of pipes. ARR tells you how much water should flow through. Cash tells you what actually reached the bucket. Reconciliation tells you where it’s dripping.
Below are the most common leak points, framed as symptoms and how to confirm them quickly.
Billing and proration issues that create hidden gaps
Symptoms
- Revenue adjustments keep appearing as late journals.
- Support tickets about billing feel constant.
- Credit notes are rising, but nobody can say why.
Typical causes
- Missing invoices for active subscriptions.
- Incorrect proration rules on upgrades and downgrades.
- Duplicate credits after plan changes.
- Wrong tax setup (VAT applied incorrectly, or not applied when required).
- Manual invoice edits that bypass the subscription logic.
Fast checks
- Track a simple billing error rate (billing tickets or corrections as a percentage of invoices).
- Review credit note volume month to month, both count and value.
- Compare revenue adjustments posted in the ledger to the change in MRR, large swings often mean the billing system and accounting don’t agree.
Billing errors are painful because they hit cash twice: you collect less, and your team spends time fixing it.
Collections and payment failures that slow cash even with strong ARR
Symptoms
- MRR looks stable, but bank receipts are lumpy.
- You keep “carrying” overdue invoices.
- Churn looks low, yet cash retention feels weak.
Typical causes
- Involuntary churn from failed cards and weak retry logic.
- Expired cards not updated, especially on older cohorts.
- Invoice customers on long payment terms, with no follow-up cadence.
- Customers staying active in the product while not paying, due to missing controls.
Simple KPIs worth tracking
- Percentage of MRR in failed payments (snapshot and trend).
- DSO (days sales outstanding) for invoice customers, measured from invoice date to cash received.
- Dunning recovery rate, the share of failed payments recovered within 7, 14, and 30 days.
Collections is not just a finance job. Product, customer success, and sales all influence how quickly customers pay and how hard you can push.
Refunds, chargebacks, and processor timing that distort the bank balance
Symptoms
- A great sales month is followed by a weak bank month.
- Cash receipts don’t match subscription reports.
- You see unexpected processor deductions.
Typical causes
- Refund policies that are too generous, or inconsistently applied.
- Disputes rising after a pricing change or billing issue.
- Processor payout delays, reserves, or rolling holds.
- Fees increasing with payment mix (international cards, FX conversions).
Fast checks
- Report refund rate as a percentage of gross billings.
- Track dispute rate and resolution outcomes.
- Reconcile processor payouts to bank deposits weekly, not monthly, if volumes are meaningful.
ARR doesn’t include payment fees. Cash does. That difference can be material at scale.
How to fix the gap, build a cash-first revenue engine
Reconciliation is not the end goal. It’s the control panel. Once you can see the bridge, you can tune the system.
Consult EFC supports UK startups and SMEs with Advisory and Accounting work that joins up SaaS metrics, revenue recognition, and cash reporting. The best results come when finance ops, reporting, and decision-making move together, not as separate projects.
Set up a monthly reconciliation pack your team will actually use
A reconciliation that lives in one person’s spreadsheet won’t survive growth. Build a pack with a standard format, owned by a named person, reviewed on a set day.
A practical pack usually includes:
- MRR movement table (opening MRR, new, expansion, contraction, churn, closing).
- Deferred revenue roll-forward (opening balance, cash billed upfront, revenue recognised, closing balance).
- Billings versus revenue bridge (what explains the gap).
- Cash collection bridge (invoices paid, refunds, fees, payout timing, holds).
- AR ageing (what’s overdue, by customer and by days).
- Refunds and disputes summary (counts, values, trends).
- Short commentary on the main drivers and what changed.
A sensible close timeline for many SaaS teams is within 10 working days of month-end. If it takes longer, the data arrives too late to guide decisions.
Improve cash outcomes with better pricing, billing, and payment terms
Cash improves when you reduce friction and reduce delay.
High-impact levers that tend to work well:
- Annual upfront incentives that protect margin, without heavy discounting.
- Clear cancellation and refund terms, applied consistently.
- Deposits for onboarding or implementation, where appropriate.
- Shorter payment terms for invoice customers, and tighter credit checks.
- Move more customers to direct debit where it fits your market.
- Strong credit control: reminders before due date, escalation after, and clear rules for service restriction if payment is overdue.
Be careful with discounts used to “hit ARR”. If discounting increases churn risk or weakens collections, you’ll feel it in cash long before it shows in ARR.
Use cash forecasting so ARR growth does not surprise you
A 13-week cash forecast is one of the simplest tools that changes behaviour. It forces timing into the conversation.
A good forecast links:
- Bookings and renewals (what you expect to sell),
- Billings (when you will invoice),
- Collections (when cash will land),
- Key outflows (payroll, hosting, tools, rent, loan repayments),
- VAT payment dates, because VAT can create sharp drops in the bank balance,
- Commissions and bonus payments, which often lag bookings by a month or two.
When forecasting is tied back to your monthly reconciliation, you stop arguing about whose number is “right”. You start agreeing on timing, risk, and actions.
Consult EFC can build reporting and forecasting that connects SaaS metrics to cash decisions, so founders and boards can see growth and liquidity in the same view.
Conclusion
ARR and MRR show demand and momentum, but they don’t explain why the bank balance is falling. A monthly MRR to cash reconciliation turns that confusion into a clear bridge: what you earned, what you billed, what you collected, and what got lost to timing, refunds, fees, VAT, or process gaps.
Run the bridge every month, fix the biggest leak first, then add a 13-week cash forecast so growth stops catching you off guard. If you want this set up properly, Consult EFC can support with Advisory and Accounting work to design the reconciliation, tighten billing and revenue rules, and build cash reporting that investors can trust.
