Start-ups should keep an eye on these 8 financial KPIs

Start-ups should keep an eye on these 8 financial KPIs

Sensible and correct controlling forms the basis for business decisions and therefore for the success of every company. Those who always have an overview can quickly recognise approaching problems, initiate corrective measures and ensure that their own company becomes successful.However, many young start-ups find it difficult to keep track of their own figures.

The problems are often similar: different IT and controlling systems are often in use and the figures first have to be compiled from these in order to get a holistic overview. This usually takes an enormous amount of time.

Or else the controlling is set up too extensively. Key figures are collected that may not even make sense at the beginning. Controlling that is too complicated can quickly become frustrating.

Often, the basic analytical understanding for the evaluation of the key figures is missing and wrong or no conclusions are drawn. Figures are only meaningful if they are seen in relation to each other and if measures and corrections result from them.

And the biggest problem is not to set up any controlling at all and to rely on things working out somehow.

But don't worry: We got your back! We tell you which indicators you should definitely collect, how to calculate them and what they mean.  

1. Cashflow

In short, the cash flow compares a company's income and expenses. This key figure is fundamental and should not be missing from any controlling dashboard. Cash flow is used to determine the cash flow from current activities and to find out how much your company is actually earning.

There are different methods to calculate cash flow. The simplest, however, is to calculate the difference between income and expenditure: Income - Expenses = Cash Flow

If the cash flow is positive, you have a surplus. If the cash flow is negative, you are running a deficit and a liquidity shortage is imminent.

2. Profitability on sales

Probably the most important key figure of every company is the return on sales. It is an important indicator of the profitability of your business.

The return on sales is calculated as follows:
(profit/turnover) x 100 = return on sales (in %).

The percentage figure describes the share of profit in the total turnover.

What sounds abstract can be illustrated with an example:

A return on sales of 10% means that you have made a profit of 10 cents on every euro you have turned over. If your return on sales increases (assuming the sales price has remained the same), this means that your start-up is working increasingly productively.

But how are the figures to be classified?

The values often differ from industry to industry, but a return on sales of 5-6% can be considered "good" for your start-up, whereby the higher the percentage, the more profitable your start-up is. Ideally, it should not be below 5%. If this is the case, you should definitely start cutting costs.

3. Runway

The runway is a future-oriented indicator. It tells you how long your start-up will have funds left, or how many months your start-up can survive if income and expenses remain unchanged.

For example, if you spend €10,000 every month but only have €50,000 left in your bank account and no income, your runway is five months. After that, you have no money left to continue financing your start-up.

Obviously, the longer the runway, the better for you and your start-up.

Of course, you can take measures to extend the runway. You can generate or increase revenues, reduce expenses or convince investors and lenders to become liquid again.

4. Gross margin

The calculation of the gross margin must also be included in your overview of key figures. It describes how efficiently you use your capital - especially in the production process. In other words, the gross margin corresponds to the profit of your company before taxation.

The gross margin is calculated as follows:
(gross profit/income) x 100 = gross margin.

The higher the percentage, the better for your business. Because then you use your money as efficiently as possible in the (home) production of your products.

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5. Monthly Recurring Revenue (MRR)

If your start-up is already generating revenue, you can use the MRR ratio to calculate the monthly recurring revenue you generate. This figure is particularly easy to calculate if you offer a subscription model for your products or services.  

It's easy to calculate the MRR:
Total revenue from subscriptions = MRR.

The higher the value, the better for your start-up. The MRR value is also a good indicator of customer satisfaction. If the value drops, more customers drop out of the subscription, they are possibly dissatisfied and you should get to the bottom of the matter.

6. Customer Lifetime Value (CLV)

You have probably heard of the CLV, the Customer Lifetime Value.

You can calculate the CLV as follows:
(contribution margin x repurchase rate) x customer lifetime - customer acquisition costs = CLV.

This describes the average turnover you generate with your active customers.

Basically, the higher the value, the better. With the help of various measures, such as up- and cross-selling, you can increase the value. Increasing the satisfaction of your customers so that they remain loyal for longer can also increase the CLV in the long term.

However, the value also allows conclusions to be drawn about the acquisition costs. The higher the turnover you make with customers, the more money you can spend on acquiring new customers.

7. Customer Acquisition Cost (CAC)

Which brings us to the next key figure: the acquisition costs per customer. This value simply tells you how much it costs you on average to acquire a new customer.

All costs from marketing and sales are included in this value without exception. This includes staff salaries as well as costs for advertising materials, software solutions and advertising.

And this is how you calculate the value:
(marketing costs + sales costs) / number of customers acquired = CAC.

It is important for this value that the costs of acquisition are not higher than the average turnover per customer. If a customer costs you more than he or she brings in, you will certainly run into the red pretty soon.

8. Average Revenue per Account (ARPA)

That's why you can't miss the number in the dashboard that tells you how high the average turnover per customer is. This ARPA value helps you to better assess the profitability of your business. The higher the value, the greater your growth potential.

This is how you calculate ARPA:
Monthly Recurring Revenue/Number of Customers = ARPA.

If you have individual customers who generate a lot of revenue, you can increase the ARPA value with just a few new customers.

Conclusion

It's important to keep track of these metrics so you can make better decisions for your start-up, not just based on vague gut feelings.

With these numbers, it will be easier for you to leave nothing to chance, build your start-up proactively and not be afraid of unexpected surprises.

Bonus: Especially for the evaluation of cash flow, it is relevant to always have an overview of what is happening in your bank accounts. If you already use Salesforce, millio can help you keep an eye on your bank accounts with just one click. Learn more about millio >