Tracking financial metrics and certain key performance indicators is crucial for running your business efficiently and optimizing your operations in the right place at the right time. The more you know about your company, the easier it is to spot issues and grow your business. Whilst certain revenue and customer acquisition related metrics only become relevant once you have launched your product, other, more basic KPIs such as your burn rate and runway are highly relevant from the get-go and should be part of your monthly controlling process, where you compare your actual KPI values with your target values. This way, you can steer your business effectively. In this article we show you 10 Financial KPIs you should track in your start-up.
Tracking KPIs closely is also highly recommended if you are looking to go into fundraising anytime soon, as most of these metrics will be demanded by investors before making an investment decision.
The number of financial metrics and KPIs you can potentially track is nearly endless, and knowing what to track as a start-up is just as important as knowing how to track them. Therefore, in this article we have gathered the 10 most important KPIs which apply across most industries (we have left out highly industry specific metrics on purpose). Moreover, we will give you an insight into how to track these KPIs.
In simple terms, burn rate is the amount of money you lose per month. If your expenses are larger than your revenues each month, you are using up your cash to finance the gap. For example, if your company generates $10,000 in revenue in a given months (i.e. money flowing in), but have spent a total of $20,000, you have “burned” through $10,000 of cash.
When your monthly revenue is greater than your expenses, then you’ll have a net negative burn rate which is a great scenario for startups, as you are effectively gaining cash each month. However, keep in mind that burn isn’t necessarily a bad thing. It costs money to build a successful company after all. Salaries, software, marketing, and other expenses all contribute to your burn rate and it is only normal that in the early stages of a start-up your expenses outweigh your revenues.
The problem comes when you’re burning too much cash or burning it too quickly.
For instance, let’s say you did a seed round of fundraising, so now you have $1,000,000 in the bank (a.k.a. cash reserves). Your startup’s runway will look dramatically different with a burn rate of $200,000 per month vs. $100,000 per month (a five month runway vs. a 10 month runway).
If your burn rate is too high or it’s shortening your runway, you’ll have to dive into what your biggest expenses are and see where you can potentially cust costs. For further information on how to do this and where to cut your expenses, check out this article on cost controlling.
As much as we all wish money was unlimited, the reality is it’s not. And whether you’re bootstrapped or you have funding, burn rate is a financial metric your startup can’t afford to ignore.
The easiest and most typical way to calculate your monthly burn rate is simply subtract all cash inflows with all cash outflows of the month. To do this, you can simply check your bank account and compare your opening balance from a given month with your closing balance of that month. For example, if you had $1,000,000 in your company’s bank account at the beginning of the month, and $900,000 at the end of the month, your monthly burn was – you guessed it – $100,000.
However, this method can give you an inaccurate picture, as certain one-off cash flows such as investments or financing are not actually part of your monthly operations and should therefore be excluded. For example, if you the difference between your revenue and your expenses was $100,000 in a given month, but you also closed a fundraising round of $1,000,000 in that same month, your cash in your bank account would actually increase by $900,000. This does not the change the fact, however, that you have burned cash in your operations. Therefore, to accurately calculate your burn rate you have to dive into your accounting data and calculate your operating cash flow, which gives you the amount of cash burned as a result of your business operations – it ignores cash flows from investments and financing, which are typically one off.
Runway is how many months your startup has before it runs out of cash. The longer your runway, the more time you have to build and grow your startup.
Your runway is determined by your cash burn and is therefore directly affected by your revenue and expenses. If your monthly expenses are greater than your monthly revenue, you’re going to run out of cash eventually. Your runway tells you when “eventually” is.
To calculate your runway, divide your current cash balance by your monthly burn rate.
Aside from the fact that your company literally needs runway to exist, this financial metric can also tell you a lot about your business. For instance, a shorter runway means you’re either spending too much money or your revenue isn’t growing at a sustainable rate. In either case, you have a few options to extend your runway:
Do determine which route to take, you should create a financial model to plan your future expenditures and revenues. Ideally, start from the back: determine a goal which you need to reach (e.g., for your next funding round) and then determine the revenue you need to reach as well as the expenditures you will have in order to get there. Introduce a monthly controlling process to make sure that you are on target to reach your goals.
Certain financial metrics are table stakes. Revenue is certainly one of them. Revenue is the total amount of money your company gets from the products and services you sell.
However, revenue as a number in itself is actually not too insightful. What is even more important to know are your revenue growth. Especially in the early years of your start-up an after launching your product, you are expected to achieve revenue growth rates of several hundred percent.
To gain even further insights, you have to break down your revenue into its sources, for example by type (recurring vs. non-recurring), products, or countries of origin. You can easily do so if you have a clean accounting structure and sorted your revenue accounts in a structure that gives you these insights.
For SaaS startups or any type of subscription-based business, monthly recurring revenue MRR) is a financial metric you need to know like the back of your hand. MRR is the amount of recurring revenue you generate from subscription customers. The beauty of MRR is that it makes your revenue more predictable than one-time sales.
For instance, if you have 1,000 customers paying an average of $50 per month, then you know your monthly revenue will be around $50,000 for the next several months (hopefully more as you get more customers).
Like with your standard revenue measurement, analyzing MRR on a deeper level gives you all the more insights. Again, you can do this with your accounting data. For example, you can split up your revenues accounts between recurring and non-recurring revenues. On the next level of your accounting data hierarchy, you can then split up your account by another dimension, such as product types.
Moreover, you should calculate your MRR growth rate. To do so, you can simply compare your previous month’s MRR with your current MRR. For a more sophisticated analysis, you should also take a look at the reasons for your MRR growth. Your MRR may change as a result of new customers, higher average recurring revenue per account or churn.
Average revenue per account (ARPA) is another important financial metric for startups. It tells you the average amount of revenue you make from each paid account you have. This is not to be confused with average revenue per user (ARPU). ARPA plays an important role in your growth strategy and how you forecast for the future.
High ARPA companies can reach significant revenue with a low number of customers, whilst the opposite is true for low ARPA companies. Typically, low ARPA companies need to rely on product-led growth and low-sales-touch strategies in order to grow sustainably, as large sales teams typically are not cost efficient when each closed deal only brings in a small amount of revenue.
Pay attention to your ARPA over time, and make tweaks to your marketing, sales and overall growth strategy in order to optimize this financial metric.
We talked about incoming monthly revenue, but there’s also a flip side to that. MRR churn, or revenue churn, is the amount monthly recurring revenue you lose from existing customers.
MRR churn comes from one of two things happening:
When a customer cancels their account, all of their MRR is lost going forward. However, when a customer downgrades their account, you’ll only lose part of their MRR.
The biggest reason you need to keep an eye on this financial metric for your startup is because you’re losing revenue. Beyond that though, you need to track MRR churn monthly to spot negative trends early. If your MRR churn rate is constantly growing, it means you’re either unable to retain customers, or customers don’t want to spend as much money with you for any number of reasons (typically their budget shrunk or they’re not getting enough value with their current plan).
In order to get insights that’ll help you reduce MRR churn, ask customers why they’re canceling or downgrading their account. Then you can build a plan of action to retain more customers and revenue.
Customer lifetime value (LTV) is a very important financial metric for startups with a recurring revenue model. LTV tells you the average amount of revenue you can expect to collect from a customer before they churn.LTV takes into account monthly revenue and the average subscription length for your customers. In order to optimize this metric, you need to:
Arguably the most important reason startups should track LTV is to understand how much you can afford to spend to acquire customers. For instance, if you have an LTV of $1,500, you can afford to spend more to acquire a customer than a company with an LTV of $500. By itself, LTV is a helpful metric. But in order to give it even more context, you need to compare it against the next financial metric on our list.
Customer acquisition cost (CAC) is the average amount of money you spend to acquire one new customer.
What exactly gets included in CAC?
Simply put, any marketing and sales costs associated with acquiring customers. That could mean:
As with most other metrics mentioned in your list, you can get these data points from your accounting data. You should set up your accounting structure in a way that you can easily distinguish between these different cost categories.
CAC can literally make or break your startup. And while you might assume your goal should be to spend as little to acquire customers as possible, it’s not quite that straightforward. It’s more like a balancing act. Spend too much
to acquire new customers and you’ll eventually run out of money. Spend too little and you’re not gaining enough new customers. The trick is to find that sweet spot when you’re spending enough to make money, but also enough to get the highest quality (and most) customers.
CAC and LTV go hand-in-hand. In fact, there’s an entire financial metric dedicated to the relationship – the LTV:CAC ratio. The LTV:CAC ratio compares the average lifetime value of a customer to the average amount of money it costs you to acquire those customers. If your ratio is 1:3 for example, that means you’re spending 3X as much to acquire customers as they bring in over their lifetime. As you can imagine, this is anythign but ideal. In fact, you should aim for a LTV:CAC ratio of at least 3:1 in the long-term. In general, anything above 1:1 is fine in the short term, as this means that you are at least not loosing money on new customers. However, a ration of 1:1 also does not mean that you are profitable, as we are only including customer acquisition costs on the calculation, and are excluding any other (fixed) costs such as research, development, and administrative costs. The closer you get to a 1:1 ratio, the more likely it is that you’re spending too much to acquire customers.
You should constantly test and tweak your strategy to find the optimal CAC. Also, compare CAC by channel (Google Ads, Facebook Ads, trade shows, etc.) to find out where to put your marketing and sales dollars to have the biggest impact.
The third part of the CAC and LTV equation is CAC payback. Your CAC payback period is the number of months it takes you to recoup your customer acquisition costs. In other words, how many months it takes you to “break even”. The shorter your CAC payback period, the sooner you start making money from a newly acquired customer.
A long CAC payback period combined with a high CAC and low LTV is a recipe for disaster. In non-acronym language, it means you’re paying so much to acquire customers that you’ll never be able to recover the money you spent before they churn. It’s nearly impossible to build a sustainable business that way, which is why looking at all three of these financial metrics for startups are so important (CAC, LTV, and CAC payback). If you’re able to get them right, you’ll have a much smoother growth trajectory and won’t constantly be concerned about your cash runway. It’s a much less stressful position to be in.
Like all the metrics on this list, the sooner you start tracking CAC payback, the more data you’ll have to make informed decisions going forward.
Gross margin is your total revenue left after factoring in cost of goods sold (COGS).
As a startup, it’s easy to get fixated on revenue and completely ignore the money you spent to make it happen. Gross margin paints a more realistic picture of how much revenue you’re really generating. Similar to what we talked about with CAC, if you’re spending more money to produce and sell a product than you’re getting in return, you can’t grow (not long term anyways).
Depending on who you ask, a “good” gross margin for SaaS companies is anywhere from 70-80% or higher. If yours is lower, don’t be alarmed. It doesn’t mean your business is sinking or that it’s time to throw in the towel. There are a number of factors that play a role in your gross margin. From the age of your startup, to the products you sell, and more. You just need to analyze what’s going on.
When you’re looking at gross margin, pay attention to the ratio of revenue to COGS. The only way to improve your gross margin is to improve one or both of those financial metrics.
The easiest and most accurate way to calculate these metrics is by using your accounting data. To do so, you need to set up your accounting structure in a “clean” way in order to be able to gain deep insights, such as revenue by country, product or type. If you do it properly, with a combination of a clean account and cost center structure, your accounting data can be a source of invaluable insights into your business.
Next, you need to be able to utilise your accounting data. You need to be able to flexibly access the cost and revenue positions you need in order to calculate the metrics you want to track. However, most if not all accounting systems do not offer the functionality to actually make use of your accounting data and calculate these metrics in an easy and efficient way. Therefore, it is typically required to do this manually by downloading a CSV export of your latest accounting data and then calculating your desired KPIs using spreadsheet software such as Excel or Google Sheets. This is a tedious and error prone effort. Moreover, you have to update your calculations manually as soon as there is new data available, which costs even more time. As a result, many companies end up not actually calculating and tracking KPIs at all.
Pectus Finance is a tool that connects directly with your accounting system (such as Datev in Germany), allows you to set up a clean and useful accounting structure (we advise on what the best structure is for you in the onboarding process) and with which you can easily calculate and track all your key KPIs as part of your monthly controlling process. Moreover, if any metrics do not hit your expectations, you can directly comment and tag the person responsible.
To find out more or to book a demo, please do so directly on our website.