While starting a business is an accomplishment itself, growing it is often much harder than many entrepreneurs expect. In fact, approximately 80% of new businesses fail to make it to their fifth year. Even with the most innovative idea and best business plan, it is vitally important to understand and regularly check the financial health of your business. Have you forecasted your monthly income and are you bringing in that amount, or more? Do you have sufficient cash flow to comfortably pay your employees and bills, or are your accounts receivable piling up? Do you have enough money in reserves to handle unexpected curveballs?
This is where consistent bookkeeping and analyzing key performance indicators (KPIs) comes in. Setting up an accounting software like Quickbooks Online or Xero can streamline your daily bookkeeping and accounting processes. This is a great place to start, but it is just the beginning of properly managing your company’s financials. At least as important, if not more, is measuring the overall financial health of your business by regularly reviewing KPIs to see the big picture and get a detailed analysis of where you are at any given time.
Different than metrics, which measure the overall health of a business, KPIs measure your progress toward specific goals. Both are important, but it is your KPIs that will help you determine if you are meeting your objectives and let you know when you need to adjust your plan. The KPIs you should review depend on the type of business, but below we have described what a few early stage companies should set up and review on a routine basis.
Customer Acquisition Cost (CAC) = Total Cost of Customer Acquisition / Number of Customers Acquired
This is the average cost of acquiring a customer and includes activities like manufacturing and distribution (for product companies) and marketing. Often CAC is further broken out into Blended CAC and Paid CAC. Blended CAC looks at the total number of customers you acquired, even those that came through free sources like word of mouth. Paid CAC counts only those customers acquired with paid channels like placing an ad on Facebook or Google. It is important to look at both so you can understand how effective your marketing efforts are and if that money should be spent in other ways. When using a CAC value, the target is to ensure the CAC is lower than the average order. Since it is a measure of how much it costs to acquire each customer, you want to ensure each customer spends more in the company than you spent acquiring them. CAC is most helpful when it is combined with other measures.
Average Revenue Per User (ARPU) = Monthly Recurring Revenue / Total Active Customers
ARPU allows you to understand how much revenue you are generating from each active customer. Companies with a higher ARPU will have more cash on hand to spend on marketing activities, where those with lower ARPU may need to look at ways to upsell current customers, increase their prices, or decrease their costs.Customer Lifetime Value (LTV) = Average Revenue Per User (ARPU) * Average Margin Per User (AMPU) / Revenue Churn Rate (RCR)
Getting a bit more complicated, your LTV is an estimate of how much money an average customer will spend with your company during their lifetime. This number helps you understand if the amount you are spending to acquire a customer is sustainable and allows you to make informed decisions on ways to improve retention, reduce customer acquisition cost, and increase the revenue generated from each customer. Looking at the LTV:CAC ratio compares the cost of acquiring customers to their lifetime value. For any recurring revenue business, a 3:1 ratio is usually a good target. This means that the value of each customer is three times the cost of acquiring them.
Customer Churn Rate (CCR) = Number of Customers Lost / Total Customers
As the name indicates, this is a measure of how many customers you are losing over a period of time. There will always be attrition, but if this number starts to grow, you will know something is happening that is causing customers to leave at a faster rate than they were before. Did you make a change that customers don’t like? Has your level of customer service dropped? Did you make a change in your products that customers don’t like? It is important to evaluate your customer satisfaction scores and complaints to get to the bottom of the issue. You can also break CCR down by other factors like customer segments, length of customer relationship, features/pricing, etc. so you can make changes to the areas at issue and stem the flow of customers. For a recurring revenue business like a SAAS business, churn should average about 5% and never exceed 10%.
Monthly Recurring Revenue (MRR) = Average Revenue Per User (ARPU) * Monthly Active Users (MAU)
This is simply the amount of revenue your company is bringing in each month allowing you to track your company’s financial situation and how much money you can expect to have on hand to pay expenses. You can further break down your MRR to New MRR or the revenue earned from new customers added in a time period, Churn MRR or what you have lost in revenue due to customer churn, or Expansion MRR or additional revenue generated by your current customers spending more money with your business. These metrics are often analyzed as part of broader corporate finance advisory strategies and real estate accounting solutions designed to support growth and profitability.
Revenue Growth Rate = (Current Period Revenue – Previous Period Revenue) / Previous Period Revenue * 100
While the math on this one gets a bit more complicated, what it shows you is simple: how much you are growing your revenue over a month, quarter, year, or whatever period you choose to measure. This shows you how profitable you are in one period over a previous one, and ultimately indicates the sustainability of your business model. Knowing this information will help you determine the best way to allocate resources. Companies in high growth mode that are considering going public should be trending above 20% revenue growth each year.
Gross Burn Rate = Cash / Monthly Operating Expenses
This is simply a measure of a company’s operating expenses and is typically measured monthly. It indicates how quickly a company will go through its startup capital before becoming cash flow positive. Venture capitalists will often use a company’s burn rate as a measurement of whether they see it as a good investment. A low burn rate indicates that investment dollars will go further, and the company is poised to gain traction and become profitable more quickly. A high burn rate means that a business is depleting its cash supply quickly and needs to decrease expenses, increase funding, or both.
Cash Runway = Current Cash Balance / Burn Rate
Once you know your burn rate, you can determine your cash runway or how long you can continue to operate at the current rate before running out of money. This can help business leaders make decisions about how to reduce costs, when to secure additional funding, and a variety of other important decisions. While these are a few of the KPIs startups can measure, there are many others to consider. The ones you should review regularly depend greatly on the type of business you have, how you are funded, how quickly you want to grow, etc.
Don’t be overwhelmed with the options. Scrubbed can help create and review the KPIs that will be most important to your company so you can make informed business decisions. If you have questions or would like our input, don’t hesitate to reach out for a consultation. We would love to be part of your team and help you realize your entrepreneurial dream.
If you have recently started a business – and secured at least an initial round of funding – you are not alone. In fact, according to data from the Census Bureau, entrepreneurial activity has skyrocketed during the pandemic with Americans starting 4.3 million businesses in 2020 and 5.4 million in 2021. This is the largest number of startups recorded in the 15 years that the government has tracked this activity.
While starting a business is an accomplishment itself, growing it is often much harder than many entrepreneurs expect. In fact, approximately 80% of new businesses fail to make it to their fifth year. Even with the most innovative idea and best business plan, it is vitally important to understand and regularly check the financial health of your business. Have you forecasted your monthly income and are you bringing in that amount, or more? Do you have sufficient cash flow to comfortably pay your employees and bills, or are your accounts receivable piling up? Do you have enough money in reserves to handle unexpected curveballs?
This is where consistent bookkeeping and analyzing key performance indicators (KPIs) comes in. Setting up an accounting software like Quickbooks Online or Xero can streamline your daily bookkeeping and accounting processes. This is a great place to start, but it is just the beginning of properly managing your company’s financials. At least as important, if not more, is measuring the overall financial health of your business by regularly reviewing KPIs to see the big picture and get a detailed analysis of where you are at any given time.
Different than metrics, which measure the overall health of a business, KPIs measure your progress toward specific goals. Both are important, but it is your KPIs that will help you determine if you are meeting your objectives and let you know when you need to adjust your plan. The KPIs you should review depend on the type of business, but below we have described what a few early stage companies should set up and review on a routine basis.
Customer Acquisition Cost (CAC) = Total Cost of Customer Acquisition / Number of Customers Acquired
This is the average cost of acquiring a customer and includes activities like manufacturing and distribution (for product companies) and marketing. Often CAC is further broken out into Blended CAC and Paid CAC. Blended CAC looks at the total number of customers you acquired, even those that came through free sources like word of mouth. Paid CAC counts only those customers acquired with paid channels like placing an ad on Facebook or Google. It is important to look at both so you can understand how effective your marketing efforts are and if that money should be spent in other ways. When using a CAC value, the target is to ensure the CAC is lower than the average order. Since it is a measure of how much it costs to acquire each customer, you want to ensure each customer spends more in the company than you spent acquiring them. CAC is most helpful when it is combined with other measures.
Average Revenue Per User (ARPU) = Monthly Recurring Revenue / Total Active CustomersARPU allows you to understand how much revenue you are generating from each active customer. Companies with a higher ARPU will have more cash on hand to spend on marketing activities, where those with lower ARPU may need to look at ways to upsell current customers, increase their prices, or decrease their costs.
Customer Lifetime Value (LTV) = Average Revenue Per User (ARPU) * Average Margin Per User (AMPU) / Revenue Churn Rate (RCR)
Getting a bit more complicated, your LTV is an estimate of how much money an average customer will spend with your company during their lifetime. This number helps you understand if the amount you are spending to acquire a customer is sustainable and allows you to make informed decisions on ways to improve retention, reduce customer acquisition cost, and increase the revenue generated from each customer. Looking at the LTV:CAC ratio compares the cost of acquiring customers to their lifetime value. For any recurring revenue business, a 3:1 ratio is usually a good target. This means that the value of each customer is three times the cost of acquiring them.
Customer Churn Rate (CCR) = Number of Customers Lost / Total Customers
As the name indicates, this is a measure of how many customers you are losing over a period of time. There will always be attrition, but if this number starts to grow, you will know something is happening that is causing customers to leave at a faster rate than they were before. Did you make a change that customers don’t like? Has your level of customer service dropped? Did you make a change in your products that customers don’t like? It is important to evaluate your customer satisfaction scores and complaints to get to the bottom of the issue. You can also break CCR down by other factors like customer segments, length of customer relationship, features/pricing, etc. so you can make changes to the areas at issue and stem the flow of customers. For a recurring revenue business like a SAAS business, churn should average about 5% and never exceed 10%.
Monthly Recurring Revenue (MRR) = Average Revenue Per User (ARPU) * Monthly Active Users (MAU)
This is simply the amount of revenue your company is bringing in each month allowing you to track your company’s financial situation and how much money you can expect to have on hand to pay expenses. You can further break down your MRR to New MRR or the revenue earned from new customers added in a time period, Churn MRR or what you have lost in revenue due to customer churn, or Expansion MRR or additional revenue generated by your current customers spending more money with your business.
Revenue Growth Rate = (Current Period Revenue – Previous Period Revenue) / Previous Period Revenue * 100
While the math on this one gets a bit more complicated, what it shows you is simple: how much you are growing your revenue over a month, quarter, year, or whatever period you choose to measure. This shows you how profitable you are in one period over a previous one, and ultimately indicates the sustainability of your business model. Knowing this information will help you determine the best way to allocate resources. Companies in high growth mode that are considering going public should be trending above 20% revenue growth each year.
Gross Burn Rate = Cash / Monthly Operating Expenses
This is simply a measure of a company’s operating expenses and is typically measured monthly. It indicates how quickly a company will go through its startup capital before becoming cash flow positive. Venture capitalists will often use a company’s burn rate as a measurement of whether they see it as a good investment. A low burn rate indicates that investment dollars will go further, and the company is poised to gain traction and become profitable more quickly. A high burn rate means that a business is depleting its cash supply quickly and needs to decrease expenses, increase funding, or both.
Cash Runway = Current Cash Balance / Burn Rate
Once you know your burn rate, you can determine your cash runway or how long you can continue to operate at the current rate before running out of money. This can help business leaders make decisions about how to reduce costs, when to secure additional funding, and a variety of other important decisions.While these are a few of the KPIs startups can measure, there are many others to consider. The ones you should review regularly depend greatly on the type of business you have, how you are funded, how quickly you want to grow, etc.
Don’t be overwhelmed with the options. Scrubbed can help create and review the KPIs that will be most important to your company so you can make informed business decisions. If you have questions or would like our input, don’t hesitate to reach out for a consultation. We would love to be part of your team and help you realize your entrepreneurial dream.
