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Innovation is everywhere, but it is not guaranteed to be big. Understanding financial metrics and how they drive a business is critical to running a successful business. Poor cash flow management can bankrupt even the most exciting startups when expenses mount and liquidity is lacking.
For startup founders, understanding and managing the financial side of things can seem intimidating, especially if you are more familiar with technology or industry niches than finance. However, the key to getting to the next level is to focus on finances and where your business is doing well and where it isn’t. Financial metrics help you refine your strategies and attract investors who want to be part of your success.
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Sales metrics
Without revenue, any business is impossible, so understanding its various components is crucial to its existence and assessing financial health. Gross sales represent the total revenue from sales before deductions. It includes all sources of income arising from the sale of goods or services.
Net sales now gives you a clearer overview. This is what remains of your gross sales after deducting discounts, returns and allowances. This is the actual income your business generates and shows its true financial health. For example, if a retail store has gross sales of $100,000 but offers discounts of $10,000 and has $5,000 in returns, its net sales are $85,000.
And then there’s recurring revenue – the reliable revenue you can count on from ongoing subscriptions, contracts, or other sources. It stabilizes your company’s cash flow and signals your potential for long-term growth. For example, a Software-as-a-Service (SaaS) company may rely on monthly subscription fees from its customers to ensure a steady flow of revenue month after month.
Profitability metrics
For startup founders, understanding profitability metrics is important to assess the health and potential success of your business. First of all, there is the gross profit margin. This metric shows the percentage of revenue you retain after covering the cost of goods sold (COGS). It is an important indicator of how efficiently you deliver your product or service.
Then there is the net profit margin. This metric gives you a more comprehensive overview and shows the percentage of revenue that remains after deducting all expenses – from operating costs to taxes and more. This is important for understanding the overall financial health and potential profitability of your startup.
Finally, there is EBITDA – earnings before interest, taxes, depreciation and amortization. This metric is particularly useful for startup founders because it focuses on the profitability of your core business, excluding non-operating expenses. It is a valuable tool for assessing your startup’s true financial performance and growth potential.
Growth metrics
Growth metrics serve as a compass for evaluating the development and long-term success of a company. Let’s start with the customer acquisition cost (CAC). This metric shows the average cost of acquiring a new customer, including marketing and sales efforts. When it comes to customer acquisition cost (CAC), a lower value is preferable. Understanding CAC helps companies refine their customer acquisition strategies for optimal efficiency.
Next comes Customer Lifetime Value (CLV). This metric paints a picture of the total revenue expected from a customer throughout their relationship with the company. CLV guides resource allocation by demonstrating the long-term value of customer acquisition and retention and steering companies toward sustainable growth.
Finally, a lower rate is preferred for your churn rate. A lower churn rate means fewer customers stop using your product or service within a given period of time, indicating higher satisfaction and loyalty, which are essential to maintaining and expanding your customer base.
Related: How to Fight Payment Fraud and Negative Cash Flow
Cash flow metrics
Cash flow metrics are crucial for startup founders because they provide insight into a company’s liquidity and financial health. Let’s start with operating cash flow, which reflects the cash flow generated from a startup’s core business, excluding financing and investing activities. This metric is crucial because it shows how well the startup can generate money from its daily activities to pay off its liabilities.
Free cash flow is what remains after capital expenditures are subtracted from operating cash flow. This is cash available for various purposes, such as rewarding shareholders, paying down debt, or investing in growth opportunities.
Related: 7 Easy Ways to Handle Cash Flow Surprises in Your Business
Then there’s your burn rate, which measures how quickly a business spends its available cash to cover operating costs. This metric is critical for assessing the company’s financial health and sustainability and helps in making resource allocation and strategic planning decisions.
Every metric you track gives you valuable insight into the health of your startup and the direction you are heading. These metrics tell the story of your startup’s financial well-being, from sales and profit margins to consumption rates and cash flow. And as a founder, it’s up to you to use this information to make smart decisions that will move your startup forward. However, it is not enough to track these metrics every now and then. Regular monitoring is essential for the survival and success of your startup. This will keep you agile, adaptable and ready to tackle whatever challenges come your way. Make it a priority to keep an eye on these metrics because they’re not just numbers – they’re the lifeblood of your startup.