Key performance indicators (KPIs), sometimes called performance metrics, are the numbers that measure how a company, a department, or a team performs. These numbers indicate a company's progress and allow stakeholders to measure and project growth.
As a startup founder, you must have a good handle on finance very early and be aware of KPIs that provide the best insights into the health of your business. It even helps your potential investors understand that you have a solid understanding of your financial situation and can make wise business decisions.
This article lists ten important financial KPIs that every startup should measure.
- Working Capital
Working capital is a critical metric the founding team must constantly pay attention to. Working capital consists of the assets and liabilities reflected on the balance sheet. Your company's working capital is your current assets minus liabilities.
Working Capital Formula & Calculation:
Current assets (property, inventory, cash, accounts receivable) - Current liabilities (wages, taxes, debts, overhead costs, accounts payable) = Working capital
Simply put, working capital is the amount of money your business has to fund its current operations.
Working Capital Ratio:
Working capital is often measured as a ratio metric. The working capital ratio is current assets divided by current liabilities.
For example, $150000 (assets) / $85000 (liabilities) = 1.7
Financial experts often consider a working capital ratio between 1.5 and 2 ideal. A bigger number indicates a company's inability or reluctance to invest well, which could hamper its growth in the long run. A negative number need not necessarily be bad for startups. However, negative working capital could be crippling for a well-established company.
- Burn Rate
Burn rate is a metric that shows the rate at which you spend your venture capital investment before generating revenue. It measures how quickly a startup spends its money or ‘burns’ its cash reserves. The burn rate is the amount of money a startup spends in a month.
For example, if a startup raises $1 million in funding and spends $50K monthly, its burn rate is $50K. At this pace, the startup can run without making any revenue for 20 months.
There are two types of burn rates. One is the gross burn rate, and the other is the net burn rate.
The gross burn rate is the total expenses incurred in a month. The net burn rate applies to startups or companies that began generating revenue. It indicates how much money a startup loses each month.
Runway is another important financial metric that founding teams should be aware of all the time. Runway and burn rate are closely related. While burn rate describes how much money a company spends each month, runway indicates how long a company can sustain with the current capital.
Usually, runway is measured in months. For example, a startup with a million dollar funding that is currently burning $100000 a month has a runway of 10 months.
Revenue is the total amount of money a company generates in a given period, a month, a quarter, or a year. It comes from the sale of products or services. Keep in mind that revenue and profit are different. Profit is revenue minus running costs.
While revenue sounds like a fundamental metric, it gets complicated as a company grows. Think of a corporation like Microsoft and imagine the number of revenue sources it has. Now compare that with your startup’s revenue sources to understand the depth of this metric and how complicated it can be.
- Customer Acquisition Cost
Customer acquisition cost, CAC, is another critical KPI startups should measure and track. CAC is the total cost of acquiring new customers through marketing and sales activities. Customer acquisition cost is calculated by dividing marketing/sales spend and the number of customers acquired.
For example, if you spent $10000 on a marketing campaign and acquired ten paying customers, the customer acquisition cost is $1000.
Startups follow a variety of campaigns to drive new customers. Each campaign can have its own CAC as a performance indicator. However, the founding teams must calculate the overall CAC, which includes employee wages, campaign costs, etc.
Lower customer acquisition cost indicates good marketing performance.
- Revenue Per Account
The average revenue per account is among the most critical metrics influencing strategic decisions. Revenue per account, RPA or ARPA, is a metric that tells you how much revenue a customer will likely generate.
Revenue per account is one metric that indicates the performance of multiple departments or functions within a company. A higher lifetime value is not just a measure of financial success. It also suggests that customers are happy with your product or service.
Revenue Per Account Calculation
Industry experts use many methods to calculate the average revenue per account. Early-stage startups don’t have to worry about complex LTV math. The easiest way to calculate RPA is to divide the total revenue by the number of customers acquired.
For example, if your lifetime revenue is $2 million and you acquired 200 customers, the RPA is $5000.
- Monthly Recurring Revenue
Monthly recurring revenue, or MRR, is a subscription-based pricing model in which customers are charged monthly. This type of pricing is popular among software-as-a-service (SaaS) companies, as it allows product-based startups to predict and budget their income more accurately.
In addition, MRR can be a valuable metric for measuring the health of a business, as it indicates whether customers are sticking around or churning.
Calculating MRR is very easy. All you have to do is calculate the number of customers your startup has and multiply them by the average billed amount.
- Churn Rate
Churn is another classic SaaS KPI. The churn rate is the percentage of customers who cancel their subscription or service within a given period. A high churn rate indicates something is wrong with your product, pricing, or customer service.
To reduce churn, you need to identify why customers are leaving and make changes to improve the situation.
Churn Rate Formula:
Customers who canceled their subscription / customers at the beginning of the period (month or year) + newly gained customers in the given period.
- Customer Lifetime Value
Customer lifetime value (CLTV or LTV) is a metric that represents the total value of a customer to a company throughout their relationship. It includes the revenue generated from purchases and other benefits such as loyalty or referrals.
CLTV is crucial because it allows companies to see a customer's immediate value and potential value down the line. It helps them make decisions about marketing and customer retention strategies.
Lifetime value calculation differs from one business to another. The calculation, however, is straightforward for SaaS companies.
CLTV = average revenue per account / churn rate.
- Sales Growth Rate
Sales growth is one of the most important KPIs for any startup. It is easier to scale a business and achieve profitability with sales growth.
There are several ways to measure sales growth, but the most important thing is ensuring your sales grow at a healthy rate. To see sales growth, it's essential to look closely at your business model and see where you can improve.
Sales Growth Rate Formula:
Current sales - past sales / past sales * 100
For example, if your startup made $10000 in the current quarter and $6500 in the previous quarter, the sales growth rate will be 53%.