Financial Metrics for Startups
Financial metrics provide valuable data and insights to give you an overview of how well your business is performing financially, from the spending required to create your product to the amount of revenue generated from each individual customer.
What Are Financial Metrics?
Startup financial metrics provide helpful information and data to measure the performance and progress of your business. Unlike key performance indicators (KPIs) that provide information related to goals and results, financial metrics offer data points to help you better understand your business’s financial performance and make meaningful, data-driven decisions.
Why Do I Need to Track Financial Metrics?
Tracking your startup’s financial metrics gives you necessary information about the performance of your startup as well as how you may be able to better allocate your resources. By combining all of these metrics, you should be able to get a comprehensive view of your startup’s current and future financial position, as well as valuable data on how to adapt in order to support long-term growth.
Key Financial Metrics for Startups to Track
Tracking your startup’s revenue is critical to understanding how much money your company is generating from sales of your product or service. Two of the most common revenue sources for startups to track are monthly recurring revenue and annual recurring revenue:
- Monthly Recurring Revenue (MRR) — This is specific to startups with models that involve a subscription or other type of recurring monthly revenue from customers. To track this, you will need to multiply the number of customers by the average revenue per customer per month.
- Annual Recurring Revenue (ARR) — Your startup’s annual recurring revenue (ARR) is the predictable revenue your startup will receive over a year. You can calculate this by multiplying your MRR by 12.
2. Burn Rate
Burn rate is the rate at which your startup spends money to maintain operations. Essentially, how much money your startup is spending to operate during a specific time period.
To calculate your startup burn rate, total the amount of money spent in the given time period. However, if you are looking to calculate your net burn rate, you will factor in any revenue generated during that time period as well.
The amount of runway a startup has determines the time the company has to build and scale and is largely informed by revenue and expenses. Not only does this metric give you valuable insight into the financial wellness of your startup, it is integral in planning for the future to ensure your business stays afloat.
Calculating startup runway is simple, you need to divide the cash you currently have by the burn rate determined in the step above.
4. Gross Margin
Your startup’s gross margin is the amount of money left over after accounting for all the costs required to produce your startup’s product or service. This metric is particularly important to investors as it communicates the amount of profit made per sale of products or services.
You can calculate this by dividing the total revenue minus the costs of goods sold by your revenue.
5. Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the amount of revenue generated by each customer over the course of their membership.
This is an important metric to give you insight into how much total revenue can be generated from individual customers.
You can calculate this by multiplying the average customer value by the average lifetime of a customer membership, this could be months or years.
6. Customer Acquisition Cost (CAC)
The amount of money required to acquire a customer is your customer acquisition cost (CAC). This can change over the lifetime of your startup – especially as your customer base continues to grow.
To determine this, calculate the total sales and marketing expenses required to obtain customers by the number of customers you received over the time period you are tracking.
7. Churn Rate and Customer Retention
These metrics go hand-in-hand. You can think of your churn rate as customer losses or, more specifically, how many customers canceled their purchases or memberships. This number you should try to keep as low as possible.
Customer retention is the opposite of churn rate. It is the amount of customers that have renewed memberships or continued to pay for your services. A high customer retention rate is a positive sign for your startup, meaning you are keeping customers happy and providing value.
Best Financial Management Software for Startups
Financial management software can help you track important metrics as well as issue statements and reports to assess the financial wellness of your startup. These are the best financial management software options for startups to track and manage their business finances:
QuickBooks is an all-in-one accounting software that makes financial management, reporting, and forecasting simple by keeping all of your startup’s finances in one place. From payroll to creating cash flow statements, QuickBooks is a great tool for managing all of your business’s financial needs.
Zoho is a cloud-based financial management software with a suite of products that work together to track and manage business finances. With tools for everything from bookkeeping to customer relationship management, Zoho is a strong option for startup accounting software.
Xero is an accounting software solution geared towards small and midsize businesses. The platform connects accounting, banking, bookkeeping, and more in one place for a comprehensive view of your business’s financial position.