Achieving profitability during early years of operations is not an easy feat for startups as they require to invest in creating infrastructure, acquiring customers and building a team. However, there are a bunch of startups that prioritize profitability from the get go and this allows them to grow by reinvesting profits, instead of depending on venture capital money.
One such startup is Y Combinator-backed Cashfree. The payment gateway firm has been profitable since its first year of operations. After offering a single payment disbursal service, the five-year-old firm offers eight features, including salary disbursal, instant refunds, subscription payments, marketplace commission settlement, and others.
To understand how Cashfree has been posting consistent profits during the last three fiscals, let’s take a look at the company’s overall financial performance during FY18-FY20, the period during which it recorded significant growth.
The payments solutions platform clocked operating revenue of Rs 7.14 crore during FY18, achieving a 7X year-on-year jump in revenue. In the following fiscal, i.e. FY19 these revenues grew 4X to Rs 27.8 crore as it was rolling out payment APIs for its clients including top players such as CRED, Xiaomi and Zomato.
As per the company, this growth was driven by their bulk disbursement product “payouts,” which is used by almost 5,000 businesses to process vendor payments, refunds, pay wages, disburse loans, reimburse expenses and more.
The growth trend continued during FY20 as Cashfree processed transactions worth around Rs 90,000 crore and its operating revenues rose 3.6X year-on-year to Rs 99.43 crore.
Many growth-stage startups, especially in the much-contested payments space have to burn cash to achieve their goals of growth in scale but Cashfree stood out as an anomaly. Its total expenditure grew 14.1X from Rs 5.2 crore in FY18 to Rs 73.5 crore in FY20, on par with overall growth in revenues.
The profitability allowed the company to fund itself from the cash generated through operations and reinvest in the business. Net cash flow from operations also shot up 36.5X from only Rs 2.63 crore in FY18 to Rs 96.12 crore
When it comes to overall burn, the payment gateway expenses remained the biggest cost element for the Bengaluru-based company throughout FY18-FY20, accounting for roughly 75% of the total money spent.
Cashfree has around 130 team members at present and spent Rs 13.34 crore on employee benefit expenses during FY20, growing 16.7X from an expenditure of only Rs 80 lakhs in FY18.
Founded by Akash Sinha, and Reeju Datta, Cashfree secured a $5 million Series A round led by South Korean VC Smilegate, which along with increased collections pushed its total assets to grow from Rs 8.8 crore in FY18 to Rs 258 crore at the end of FY20.
Around 99.3% of these are parked in current assets by the company. Cashfree had posted profits(after tax) of Rs 1.4 crore during FY18, this figure has grown 14 folds to Rs 19.54 crore during FY20.
The company benefits from its asset-light structure with a lower percentage of fixed costs on the expenses sheet, helping Cashfree to scale its operations up or down with relatively less friction.
For instance, even while it achieved a 3.6X growth in gross sales during FY20, its Net Profit margin improved to 19.4% from 14.7% it earned in FY19.
Prioritising profitability in the early years of the foundation isn’t common among startups but it offers an alternative way to grow without raising capital. Cashfree has been profitable in a business where deep-pocketed players have been losing money year after year. For example, PayU, Paytm and Razorpay are yet to churn profit from the payment gateway business.
The financial performance of Cashfree in the last three fiscals has been outstanding. Besides growing profits, the company has gradually added eight new verticals and strengthened its existing offerings. In a nutshell, Cashfree shows that startups can grow on the back of profit.