There are a great number of things to consider when you’re starting up a business, and your finances will probably be near the top of your list. But it’s not just about making sure you have enough money in the bank. Business owners who are serious about their growth, preparing to pitch to investors, and potentially take out business loans need to make sure they’re clued-up on key financial metrics.
In this article, we’ll be looking at 10 key financial metrics that every startup founder needs to know before they start actioning their plan for world domination. With these important terms under your belt, you’ll be sure to see greater success as well as fewer hurdles standing in your way.
1. Burn Rate
Put simply, burn rate is the amount of money you are losing every month, on a month-by-month basis. While it is a metric to calculate your losses, it’s significant to know that the burn rate isn’t always bad – and very few startups will see a month without a significant one. A great number of things will contribute to your burn rate; after all, it is calculating your overall losses throughout the month, not just lost customers.
As a startup, keeping an eye on your burn rate is key, even though it will likely be fluctuating a lot during your first few months in business. Stay on top of your finances and you should be prepared for any significant losses coming your way.
2. Monthly Recurring Revenue (MRR)
If you are offering a subscription-based product, you will definitely need to know about MMR. As this is more predictable than one-time sales, you can benefit from a much clearer picture of your revenue stream several months in advance, which can help inform important business decisions such as expanding teams or taking out loans.
3. MRR Churn
On the flip side, MRR churn is the revenue you are losing from your customers – for example, customers who cancel their subscription or choose a subscription at a lower price point. Tracking this metric should give you interesting insights about how well you retain your customers and will give you the opportunity to notice negative trends sooner rather than later, and nip them in the bud.
4. Customer Lifetime Value
If you have a recurring revenue model, customer lifetime value (LTV) will be an extremely valuable metric for you to track. This metric will be able to tell you how much revenue you can be expected to gain from a customer before they drop out, or churn. If you are able to maintain a customer’s interest in your product and keep them paying a set fee, this will become clear in your high LTV rates.
5. Customer Acquisition Cost (CAC)
Most businesses will already be aware of this metric, but it is worth mentioning nonetheless. CAC is the amount of money spent to acquire each customer. This will usually feature money spent on your marketing activities, for example paying for ads or paying the salaries of any marketing professionals you hire.
For startups, typically, you will be required to at least spend some of your capital on marketing activities, however, the trick is to keep your CAC to a minimum while still generating leads from your marketing efforts.
6. Average Revenue Per Account (ARPA)
Quite simply, this metric will tell you how much revenue you are generating from each account you are in business with. Sometimes this can be confused with Average Revenue Per User (ARPU) but they do generally differ, depending on the services you are offering.
Runway is a metric that most startups will measure in their first few months of business. It is to calculate how many months your business can run before funds run out. This is determined by your revenue and expenses. Naturally, the longer your runway when you start trading, the more time you have to grow your business and make it even longer.
8. Return on Investment (ROI) ROI
This is a general metric used by many different types of businesses – it tells you how effectively you are running things, i.e. how much are you getting out of what you have put in? You can calculate ROI using this formula Total Loss/Profit ÷ Total Investment x 100.
9. Cash Conversion Cycle
This metric is used to calculate how long it takes a company to convert what is invested in inventory into cash received from customers. To calculate Cash Conversion Cycle you must take into account both the time it takes to sell your inventory as well as the time it takes to collect payment from customers. The metric is expressed as a number of days.
10. Gross Margin
This is the big one – your total revenue remaining once you have factored in the complete cost of goods sold. Startups can often forget to factor in all of these costs as they are reluctant to take away from what they see as ‘profits’, but it’s important to see past this and understand that to ensure growth, you must paint a realistic picture of how well your business is performing. Are you prepared to see your startup succeed? Hopefully, these essential financial metrics have given you an insight into what you need to be tracking in order to ensure continued growth.
About the Author: George Holmes is a Business Funding Specialist and Managing Director at Aurora Capital, a team of independent finance owners who help businesses thrive and achieve their long-term goals.
If you are interested in even more business-related articles and information from us here at Bit Rebels, then we have a lot to choose from.