Building a profitable business requires an in-depth understanding of the financial KPIs (key performance indicators) driving your company’s growth.
You may see success in the beginning by only focusing on customers and improving profits, but that won’t be sustainable. Later, KPIs centered on business expansion and attracting a broader range of loyal customers will be more helpful.
These seven financial KPIs are essential for growing your startup.
Customer Acquisition Cost
Customer Acquisition Cost (or CAC for short) measures the average cost to acquire a new customer. To determine CAC, divide all marketing costs incurred by the number of new customers acquired during the period.
Because a startup’s brand and products are new to the market, it’s easy to allow your marketing spending to grow out of control. But as you better understand your customers’ needs and find ways to grow organically, your CAC will reduce.
In the short term, you may have periods where your CAC is high. However, you’ll run out of cash if you can’t keep your CAC under control, so making an effort to keep it low is essential.
Burn rate measures the negative cash flow in startups, in short, how quickly you go through funding.
When you start your operations, the amount of money you spend or “burn” depends on many factors. The business model, your startup’s personnel structure, and your company’s growth strategy all impact your burn rate.
As a founder, you need to know how quickly your operations consume your funding. Your burn rate will help you see how much time you have left to:
- Reach profitability
- Secure additional funding
Company management should always have an eye on the company’s burn rate. Constantly searching for opportunities to reduce burn rate gives the company more time to achieve profitability.
Runway pertains to how long you can operate before running out of cash. Essentially, it will help gauge when your startup needs additional capital through loans or outside funding.
When calculating the runway, you first need to determine your current liquidity or net cash position. Then, divide your net cash into your negative cash flow. The result is your runway – the number of periods you have until your funds run out.
Lifetime value analyzes and measures the revenue a customer pays you before they churn. LTV is also good to use in tandem with CAC. These KPIs together will lead give you an idea of how long it will take before you start generating revenue from each new customer.
On its own, LTV helps you see the complete relationship between you and your customers. This is important because keeping your customers is less costly than acquiring new ones.
LTV is also a good forecasting metric in a SaaS business that helps you plan top-line revenue.
Profitability is simple, and long-term success depends on achieving it. Your business merely needs to generate more revenues than costs.
To compute your startup’s profit margin, deduct total expenses from your sales. Then, divide the difference into its revenue. This rate (in %) will help you to better control:
- Product pricing
- Product costing
But the simple process of earning and maintaining a steady profit isn’t easy. Putting all your attention on cash inflows doesn’t guarantee a thriving business.
Accurate profit margin estimates make favorable future results more likely, and a data-driven financial plan helps you manage your business’ profit margins better.
Average Revenue Per Account
The Average Revenue Per Account (ARPA) is the average amount of money you make for each active account.
This financial metric focuses on the business’s revenue base and gives insight into maximizing your revenue potential per customer.
Imagine you have three pricing tiers for your product or service. Typically, customers consider the lowest pricing option first to optimize their own expenses. To counteract this natural tendency and optimize your revenue, you must create incentives for customers to choose the higher-priced tiers.
However, while it plays a vital role in your growth strategy, a higher ARPA shouldn’t be your only focus when setting your financial KPIs. ARPA should be optimized based on your company’s business model and goals.
Revenue Per Employee
Revenue per employee is simply total revenue divided by the number of employees.
The average amount of revenue one employee can bring in reflects the company’s profitability. It’s beneficial for determining when you need to (or can) hire more employees.
Having the right team on board at the right time is essential for the success of a growing company.
Rely on an Accountant to Track and Utilize KPIs to Grow Your Startup
Tracking the right metrics and making adjustments based on the info collected is critical for growing a healthy business.
Learning to use and forecast these KPIs can help your startup drive healthy financial growth.
When looking for an expert to help you utilize KPIs, choose an accountant who understands the full potential of this data and how to use it.
At Founder’s CPA, we can help you pick and leverage the right metrics. Set up a free consultation with one of our startup experts, and let us help you build a startup that will make a difference.