Understanding your startup and its financials is critical. These early-stage metrics let you keep a finger on the pulse of your business so you can predict your future earnings and your organization’s long-term health.
We’ve divided these key indicators into categories. Start tracking these now to keep your costs in line and your revenue healthy.
Customer-Based Numbers
Key performance indicators (KPI) related to your customer base are some of the earliest indicators of how profitable your business will be after expenses. Keep an eye on these to predict both future spending and how much you can expect to bring in.
Customer Acquisition Cost (CAC)
Your customer acquisition cost is how much it costs, per customer, to bring in new business. The easiest way to arrive at your CAC is to take a specific period of time and divide the cost of your marketing and sales efforts by the number of new customers you gain.
For example, if you spend $1200 on a marketing campaign and gain 25 customers, your CAC is $48.
Obviously, a lower CAC is better. However, the amount your startup will spend varies greatly with your product, industry, and the value of each customer over time. If your CAC is going up without generating comparable returns, this can signal cash flow trouble ahead.
Customer Churn and Retention Rate
Your churn rate or retention rate is an evaluation of what proportion of your customers stay with you, and what percentage leave.
One way to calculate your churn rate is to look at your total number of customers over a specific span of time, then divide that by the number of customers you had at the beginning of that period.
For example, if you began the month with 15 customers, then had six new sign-ups and four cancellations, your calculation will look like this:
Sixteen (total customers) minus six (new customers) equals 12. Divide by 15 (original number) to get .8. Your retention rate is 80%, which means that you kept four out of five customers in the previous month.
Revenue-Based Numbers
The customer-based numbers above help you figure out your potential revenue and your return on what you spend. The numbers in this section help you determine how much you have on hand and how quickly you are spending it. Understanding how quickly money is going and where you are spending it is vital to your startup’s sustainability.
Burn Rate
Your burn rate is how quickly your startup is spending money. Burn rates are not constant. There will be times of heavier spending, and times when you are able to cut costs.
Luckily, this is a fairly simple KPI to generate. Start with your total cash on hand at the beginning of the month, then your total cash available at the end. The difference is your burn rate.
Cash Runway
It can sometimes take many months for even a well-funded startup to become profitable. Your cash runway tells you how much time your current funds will last. Your cash runway can help direct your activities for the most sustainable path possible. For instance, a short runway can mean that you need to increase your fundraising efforts or cut spending.
Typically, your runway is calculated in terms of how many months you can run at your current burn rate. This is just a snapshot; increases or decreases in spending will make this number change. This number should be calculated regularly so you can adjust as needed.
Cash Flow
Cash flow refers to the amount of money that comes into and leaves your business during a specific period of time. If more money is coming in than going out, you have a positive cash flow. Congratulations, this puts you in a more sustainable position.
A negative cash flow, on the other hand, is something that bears greater scrutiny. During times of aggressive growth, a negative cash flow may be expected. However, if your cash flow is dwindling because of reduced income, it’s time for some adjustments.
There is no shortcut to tracking cash flow. You need to track all money coming into the business, and all money going out in order to arrive at an accurate figure. Because cash flow can vary, it pays to keep track of it on a consistent basis. This will help you identify patterns over time. You’ll be able to see when it’s safest to invest more in your growth, and when you need to change course to correct potential cash flow issues.
Work with an Experienced Accounting Partner
Tracking the right metrics from the start can give your startup the edge it needs to thrive. At Pasquesi Partners, we can help you grow your startup by tracking the right numbers to gauge your company’s health.Curious what we can do for you? Learn more about our accounting services here.