How are you doing today? How about this week, this month, or this quarter? When it comes to your early stage business, knowing how your company is doing in several distinct respects is essential for the survival, profitability, and growth of your company.
Key performance indicators (KPIs) are the vital signs that measure the health of your enterprise. Every start-up needs to understand what KPIs are, what aspects of the business need to be measured on a regular basis, and how to respond or course-correct once those KPIs are in hand.
What are KPIs?
KPIs are the benchmarks which you use to measure the functionality, efficiency, and achievement of various components of your company’s operations. There can be multiple KPIs that address finance, KPIs that evaluate the effectiveness of your marketing, and KPIs which measure personnel performance, among others.
Why are KPIs Important?
Successful entrepreneurs know how to adjust when market forces or internal issues lead to results which do not comport with projections and assumptions. By establishing and regularly monitoring KPIs, you can see any deltas between expectations and reality and take the necessary steps to close that gap.
Additionally, investors and lenders will want to see your KPIs as part of their due diligence. You’ll want to have these metrics top-of-mind when you walk into that meeting or present your prospectus to potential financing sources.
5 KPIs Every Startup Needs to Measure
Every business is different, and you could come up with an almost infinite number of KPIs if you wanted to. But the key is the “key” part of KPI; those fundamental aspects of your operations around which everything turns.
Here are five basic KPIs every start-up should be able to regularly measure:
Burn rate:
The amount of money going out your door each month is your company’s gross burn rate. If your business isn’t yet turning a profit, you should also calculate your net burn rate, which is the amount of money you are losing each month when your expenses are subtracted from your incoming cash. Combined, these burn rates will tell you what you need in terms of revenue or additional capital infusion to pay for operating expenses before you run out of money.
Customer Acquisition Costs:
Congratulations! You just acquired a new customer which should bring in $5,000 in revenue. Of course, to snag that new customer, you spent $10,000 in employee time, marketing, research, advertising, sales team salaries, and other hard and soft costs. Combined, these are your customer acquisition costs (CAC) and if they regularly exceed the amount of revenue each of those customers generate, you won’t be around for long. Knowing your CAC will allow you to adjust your sales and marketing operations to bring those costs down and increase the profitability of each sale.
Life Time Value:
This is the metric which you’ll contrast with your CAC. The amount of revenue a customer is expected to generate over the entire course of your relationship is its life time value (LTV). You want to keep your LTV higher than your CAC.
Churn Rate:
Keeping existing customers is a more efficient way to generate revenue than acquiring new ones. Your churn rate shows how well you hold on to your customers. If you regularly hemorrhage customers or see dramatic changes in trend lines, these need to be addressed immediately.
Revenue Growth Rate:
This metric measures the month-over-month percentage changes in your company’s revenue. This can help you understand how quickly your young company is growing.
By keeping up with your company’s KPIs, you can keep a keen eye on where you are and where you need to be for sustained growth and success. If you have questions or concerns about how to establish and measure KPIs for your start-up, please contact us. We welcome the opportunity to assist you.