Many startups use KPI accounting as a shortcut to success. KPIs and metrics can tell the story of what’s happening in your business so that you can quickly decide what’s working and what isn’t.
Measuring progress is a central factor in achieving your personal and professional goals. A metric’s value can be increased or decreased depending on how management applies it to the decision-making process, dramatically impacting whether it’s a meaningful KPI for your business.
For instance, tracking the total number of customers and lifetime value since inception allows you to see which changes and developments significantly impacted your business. These KPIs show you precisely what has worked in the past.
A KPI can help you define what to do next, whether you’re looking at revenue, churn, or retention rate.
Accounting KPIs are a set of financial metrics used to measure the progress and performance of a company. Founders also use metrics to gauge the health and efficiency of a business and its ability to meet its targets.
Some essential accounting KPIs include Monthly Recurring Revenue (MRR), Customer Acquisition Costs (CAC), Average Revenue per User (ARPU), and retention rate. These metrics provide a clear picture of your business’s financial performance.
Accounting KPIs can be critical indicators of your company’s health: trending up or down might signify something’s wrong in your business. However, many companies choose not to focus on these numbers because analyzing them can be overwhelming.
Accounting KPIs can help with a variety of business topics:
Vanity metrics are the numbers you track that don’t matter. For example, the number of app downloads or website visitors may seem essential but can be misleading.
Imagine you’re running a startup and want to know how many visitors visited your website last month. You can count the number of unique visitors or page views, and both are vanity metrics because they don’t tell you anything about what those customers did on your website.
Fortunately, there are plenty of meaningful business metrics to track that can help you steer your business.
MAUs measure the number of unique users interacting with your product or service within a month. It’s a great indicator of your users’ engagement and can help you understand how many people use your product regularly.
CAC measures the cost of acquiring new customers. You calculate this KPI by dividing the total amount spent to attract new customers by the number of new customers gained. Understanding how much you pay for each new customer, including marketing expenses, is essential to reaching profitability.
The percentage of active users remaining at the end of a period is known as the retention rate. It’s closely linked with the following metric and, over time, shows how long customers will stick around.
A high retention rate means people use and find value in your product.
Closely linked to retention rate, churn is the percentage of customers who discontinue using your product or service over time. Analyzing churn rates is important because it indicates customer satisfaction.
Managing churn can also help you understand if you have a problem with your product and help you identify corrections.
One of the most critical KPIs for startups, especially if you’re in e-commerce or traditional retail, LTV measures a customer’s total revenue throughout their relationship with your product or service. Ideally, your LTV should be significantly higher than CAC; otherwise, you are losing money with each new customer.
This essential startup metric, ARPU, measures the average total revenue generated per user. It can help you determine product performance and whether or not you’re generating enough cash to sustain operations.
CSAT measures customer satisfaction with your product or service and is typically measured using customer surveys. It’s a popular startup KPI because it helps determine if you’re solving customers’ problems, providing value, and making money. It also gives you an idea of how much time and energy your customers put into using your product or service.
NPS measures organizational performance and customer satisfaction using a 0-10 eleven-point scale, where ten is the best. It asks customers to rate their experiences, with 0 being the lowest and 10 being the highest. The responses fall into three categories: promoters (give ratings of 9-10), passives (choosing 7-8), and detractors (0-6).
This data calculates the NPS score by subtracting the percentage of detractors from the percentage of promoters (and passives are excluded). The result is an overall score ranging from -100 (all detractors) to +100 (all supporters). Higher numbers indicate higher customer satisfaction with your product or service.
Building a solid business requires you to know where your startup stands and its trajectory for the future to ensure that you’re on the right track. KPI accounting can help you understand what’s happening in your company and its financial health, and it can also help you define what aspects of your business are functioning well and which need some work.
Of course, KPIs are rarely one-size-fits-all, and different startups may need to tailor their metrics depending on the sector and business model. Contact the startup accounting experts at Founder’s CPA today, and together we can help you ensure that you’re focusing on the right KPIs for your company.
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