How to Understand Your Key Startup Financial Metrics
Value is created through tuning into what creates revenue. By asking how that creation can be repeated with less wasted costs, all while capturing more of the revenue as profit. As Warren Buffet once famously quipped about how to best make money, “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Growth is supported best when you are efficiently able to redistribute those captured profits back into scaling your sales and outreach. Being able to demonstrate your success at wisely utilizing the revenue your company has brought in at an early stage is one of the key elements that attracts outside investors to pump in cash and join in scaling you to that next level.
The fastest way to move towards your goals of building up and out is time and time again reflected in benchmarking key financial activities.
By setting up what needs measuring and tuning into the numbers you have the diagnostics to keep on task and answer needs with minimal guessing.
As a guideline here are three key areas to track and the top metrics within each.
- Revenue run rate. Take your recent numbers and see what the year ahead looks like. How strong is your annualized return once you calculate it? How does it compare to your peers? Are you in the lead or do you need to tighten your game next month strong?
- Next up, take a look at who’s buying. What is the ARPU (Average Revenue Per User)? How much is each client providing towards your revenue? What is the average overall? Dig deep there and look also at customer mix. What segment is providing a higher than average contribution towards sales? What is the basket size of each segment and how greatly do they differ? What pipeline are they in, what is the trend there? These questions let you see where to focus hardest and where to back off if it isn’t profitable comparatively or worth the investment.
- Ad/Event spending, this is one of the biggest expenses externally that can be adjusted. Dialing into the numbers on a key variable expense like this is crucial. Knowing when and where it’s worth it rather than running on a schedule alone can save tremendous amounts of wasted capital or attract it wisely.
Client Base and Scalability
- Now that you have a picture of the ARPU it is a good time to look into what it takes to create them. Calculate your CAC (Customer Acquisition Cost). How much is each client costing? What is the ratio between each segments payoff and what it takes to develop them? Is there room to bring on more salespeople and are the ones you have hitting reasonable goals?
- Of course knowing Churn Rate plays a major factor. How well are you retaining each customer? Track the total and make sure to keep an eye on the trend quarter to quarter. Just like with managing your capital, retaining existing clients are the best way to build out your base. No one wants to unnecessarily start over when a well-developed relationship can be much more lucrative.
Now we look inside the firm itself:
- Bringing in the money is only the beginning. Burn Rate is your number one inside metric. How much time do you have at current levels of sales? Are you breaking even? Turning Profits? Is the burn rate accelerating or decreasing? This can be a practical insight towards whether an inflection point is being closed in on or drifted away from.
- On that note what is your Operation Efficiency? Tracking the ratio for all SGA (selling, general and administrative expenses) to sales numbers is a surefire way to see how well and how lean you are running.
- Tied into operation efficiency if you have a sizable team measure the Revenue per Employee. This will help provide guidance with hiring of what the average contribution sought should be to grow. Often the largest expense for a startup is salary.
- Another popular and useful metric, especially for valuation purposes, is EBITDA (earnings before interest, taxes, depreciation and amortization). While not a GAAP compliant metric it is useful as a conceptual “capital structure neutral” barometer of earnings that strips out the effects of debt and government obligations.
- And lastly let’s not forget Gross Margins. What is the ratio of revenue to COGS (cost of goods sold)? Both the overall percentage as well as its trend over time. This measure is where you see how your management, customer service and sales teams are coming together. How developed is your company and what stage are you at?
It doesn’t have to be hard but it will make a difference tracking these. Build your systems to gather the numbers and see how solidly it all connects.
Once you can develop steady numbers and prove your goals are achievable then you can begin to imagine the road ahead with a clearer view.
If you have any further questions, contact Early Growth Financial Services for a free 30-minute financial consultation.