As a startup founder, you may find navigating the financial landscape challenging as you come to terms with the various legal and taxation requirements you must fulfill. One aspect of the process is obtaining a keen understanding of key financial metrics that impact your startup.
These metrics are also known as Key Performance Indicators (KPIs) and help you assess your startup's performance. This knowledge can prove to be particularly helpful in making informed decisions aimed at driving growth. You can also use this information for fundraising to bring in new investors. In this guide, we provide an overview of certain key financial metrics/KPIs.
Key Performance Indicators (KPIs) or Financial Metrics
The metrics that are suitable for your startup may be different from those used by an established company. However, a common set of KPIs most businesses track include the gross margin, net profit margin, sales revenue, year-on-year sales growth, net promoter score, cost of acquiring customers, loyalty and retention of customers, and monthly qualified leads. These can be broadly grouped as revenue, profitability, growth, and cash flow metrics. Choose your KPIs based on your business needs rather than random selection.
1. Revenue KPIs/Metrics
Tracking the revenue generated by your startup is vital to know whether your business is making a profit or loss. It also indicates whether there is demand for your product or service. Revenue generally includes the amount received from the sale of products or services, investments, and other sources. It forms a vital part of your income statement and is a primary indicator of business performance. Revenue metrics include gross and net revenue metrics.
i. Gross revenue/profit
The gross revenue metric denotes the total income from your startup without considering any operating expenses. Compute your startup's gross profit by reducing the income received by the cost of goods sold.
ii. Net revenue/profit
The net revenue metric indicates your income after deducting all your expenses including sales returns, discounts allowed to customers, operating expenses, interest, taxes, etc.
2. Profitability KPIs/metrics
Profitability KPIs can help you assess the financial health of your startup and ascertain whether you are likely to succeed in the future. The profitability metrics are:
i. Gross profit margin
The gross profit margin metric indicates the percentage of income you still have in hand once the cost of goods sold (COGS) is deducted. It helps you understand how well you have priced your product.
ii. Net profit margin
The net profit margin goes a step further than the gross profit margin, indicating the percentage of income that remains with you once you have deducted all your startup's operating expenses. The net profit margin gives you an indication of the overall success of your business.
iii. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
As a startup founder, the EBITDA is of particular significance due to its focus on the profitability of your startup's core operations. Non-operating expenses like depreciation, taxes, and interest are not taken into consideration when calculating the EBITDA. EBITDA is vital in assessing your startup's actual financial performance and growth potential.
3. Growth KPIs/metrics
Growth KPIs/metrics help you determine the trajectory of your startup and whether it is performing as anticipated. These KPIs can help a startup founder evaluate the possibility of the company attaining long-term success. Growth metrics include the following:
i. Customer Acquisition Cost (CAC)
This KPI/metric tells you how much you spend on average to gain a new customer and includes all your marketing and sales activities. Knowing your startup's CAC can help you adjust and optimize your plans for acquiring new customers. A lower CAC is always desirable.
ii. Customer Lifetime Value (CLV)
This KPI/metric helps you estimate the total income you are likely to receive from a customer throughout their association with your startup. The CLV metric offers guidance in resource allocation and demonstrates the long-term benefits of retaining customer loyalties.
iii. Churn rate
The churn rate refers to the percentage of consumers your startup lost during a specific period. A lower churn rate is always desirable as this means you retained more customers during the period being considered. This indicates higher satisfaction and loyalty among your customers.
4. Cash flow KPIs/metrics
These KPIs/metrics offer insights into the liquidity of your startup. You will better understand the movement of liquid cash within your startup. These KPIs will help you manage cash flows to minimize financial risk and improve your market valuation. Cash flow KPIs/metrics are:
i. Operating cash flow
This KPI reflects the cash received from your startup's primary functions. It excludes cash that comes in through investments and finance. The operating cash flow metric tells you how well your startup can generate cash to fund its daily functions.
ii. Free cash flow
This KPI is calculated by deducting capital expenditure from your operating cash flow figure. It denotes the free cash you can use to invest, pay off debt, compensate shareholders, etc.
iii. Burn rate
Burn rate indicates how quickly your startup uses up capital before it begins making money from its operations. This rate is often calculated every month. Understanding your startup's burn rate helps you manage cash flow and determine how long you can sustain its operations before seeking additional funding.
iv. Runway
The runway indicates how long your startup can operate before running out of cash and is based on your current burn rate. Runway is crucial for planning future funding needs and making strategic decisions on spending.
As a startup founder, understanding and regularly monitoring these KPIs/financial metrics will empower you to make informed decisions, draw in investors, and drive growth. It ensures you are better informed on the financial aspects of your startup and can steer it toward long-term success.
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