Key accounting metrics help startups plan strategically for the future and enable them to track financial performance. They also allow investors to understand whether or not they’ll get their desired return on investment (ROI) when they invest in a company.
To ensure startups aren’t caught off guard when an investor inquires about company progress and financial health, startups should keep an eye on key accounting metrics like burn rate, acquisition cost, and gross margins.
But are these the only metrics startups should track? Let’s discuss common metrics startups should keep track of and how accountants for startups can help them track key accounting metrics.
1. Cash Flows
The cash flow is the amount of money coming in and going out. It’s a crucial component to track for any startup because it directly indicates the company’s financial health.
Cash flows include income from sales, taxes, business expenses, and other everyday business payments. They can be divided into two major components:
- Operating Cash Flow – It’s the amount of money that comes from sales and goes out for operational costs, which include rent, utilities, payroll, etc.
- Investing Cash Flow – It’s the amount of money that comes in from investments and goes out for capital expenditures, like equipment, furniture, and software.
Long-term and short-term goals are both critical when tracking cash flows. Long-term cash flows are typically measured over a year, while short-term cash flows are measured over a month or a quarter.
Regularly tracking these goals helps startups identify areas where cash flows in or flows out too quickly.
2. Runway
A cash runway is a time a startup has before it runs out of cash. The longer the runway, the more time a company has to stay afloat.
A startup’s revenue and expenses determine the length of a runway. For instance, if a startup’s expenses are higher than the monthly revenue, ultimately, it’ll run out of cash. The runway tells the ultimate time before the startup runs out of money.
Startups can extend their cash runway at a sustainable rate by:
- Getting more funding
- Reducing expenses
- Increasing revenue.
Understanding which option would yield the longest cash runway can be determined by creating a financial model with different scenarios.
Working with scenarios helps startups look into their financial health and determine if they’re missing out on potential growth opportunities. It also helps them forecast, spot issues before time, and correct financial irregularities before they get out of control.
3. Burn Rate
The burn rate is the amount of money a company loses monthly. A startup cannot calculate its runway without knowing the burn rate.
For instance, if the monthly revenue is higher than expenses (which is typically the case for startups), the startup will have a net negative burn rate.
There are two ways a startup can calculate the burn rate:
1. Gross Burn Rate – These are the operational costs a startup spends monthly without considering the revenue.
2. Net Burn Rate – It’s the cash the company loses monthly. The net burn rate also takes the revenue into account. So, if a startup spends too much but recovers that money in revenue, the net burn rate will be mitigated.
Burn isn’t bad, but it can be a problem when a startup is burning cash too quickly or too much of it. So, the burn rate is a financial metric startup can’t afford to ignore.
4. Monthly Recurring Revenue (MRR)
The MRR is the recurring revenue generated from subscription customers. It also makes revenue easier to predict compared to one-time sales.
For instance, if a startup has 500 subscribers for $20/month, then its revenue will be $1,000 for the next few months or until it gets an increase in subscribers. So, if a startup has a subscription-based business, the MRR is an essential financial metric to track.
5. Revenue
Revenue is the net income a startup makes from selling products or services. Most startups are primarily concerned with overall revenue.
However, they’ll be able to get more insights by breaking down revenue according to types, such as recurring and non-recurring revenue, and the source, which are the plan and product levels.
6. Customer Lifetime Value (LTV)
The customer lifetime value (LTV) is the revenue a customer helps generate for a startup over the lifetime of their membership. The LTC value tells the average revenue that needs to be collected from a customer before they churn.
To optimize this metric, startups need to:
- Ensure their customers’ pain points are met and that they stay happy with the product or service for as long as possible.
- Increase the amount of revenue customers spend with them.
7. Customer Acquisition Cost
The customer acquisition cost (CAC) is the average money a startup spends to acquire new customers. The CAC indicates the success of a startup and includes the following costs:
- Marketing materials
- Marketing and sales employee salaries
- Advertising spend
- Marketing and sales employee salaries
Many startup owners think minimizing the CAC is the optimal solution to increasing revenue but aren’t considering the bigger picture.
For instance, if they overspend, they’ll waste financial resources and won’t get any leads. But if they don’t spend enough, they won’t be able to get optimal results.
So, the key is determining the optimal point where a startup spends enough to generate revenue while attracting the most valuable customer base.
Conclusion
Running a successful startup while retaining customers is the precursor to business success. However, that can’t be done unless startups keep track of key accounting metrics like cash flows, burn rate, CAC, and more.
Not tracking financial metrics can lead to missed growth opportunities and make building a sustainable customer base challenging. Unfortunately, most startups don’t have the time to dedicate to their financial reports. That’s where accountants can help.
Accounting firms enable startups to keep their balance sheets in order and help them track their performance, ensuring they know where to put their efforts.