As funding for technology startups and emerging growth companies face continued pressures, there will be an increased investor due diligence and review of key operating and financial key performance indicators (KPIs). The depth and complexity of startup KPIs can be as simple as a back-of-the-napkin calculation or as complex as a merger of multiple customer relationship management (CRM) systems and financial information. No matter the stage of growth, the ability to summarize multiple data points into meaningful metrics is critical to successful financial and operational growth.
Key Startup Metrics
While not comprehensive, the following are key startup metrics companies should use to track and monitor growth and proactively identify challenges. Each KPI provides insights that – whether good or bad – create opportunities for corrections and decision-making.
1. Annual Recurring Revenue (ARR)
ARR represents a startup subscription-based revenue on an annualized basis. ARR provides visibility into a startup’s sales and growth pipeline. ARR’s continued growth is evidently healthy and sustained growth compared to a decline, which can be a red flag.
ARR is calculated by:
– Monthly Reoccurring Revenue (MRR) X’s 12 months whereas
– MRR = Number of customers X’s average revenue per customer
– For example, if a startup has 50 customers paying an average of $1,000 per month
– 50 customers X $1,000 X’s 12 months = $600,000 ARR
2. Customer Churn Rate
Customer churn rate is the percentage of lost customers over a period. While customer churn is expected, an increasing churn rate is evident in customer retention challenges.
The customer churn rate is calculated by:
– (Number of customers lost during a period / Number of customers at the beginning of period) X’s 100
– For example, at the beginning of the month, a startup has 50 customers and lost four customers during the month, the churn rate is calculated by
– (4 customers lost in month / 50 customers at the beginning of the month) X’s 100 = 8%
3. Customer Acquisition Cost (CAC)
CAC measures how much a startup is spending to obtain new customers. In the early stages of growth, a higher CAC is expected. Still, as time progresses, an incremental decrease is a vital metric to monitor if customer acquisition costs result in returns.
Here is how CAC is calculated:
– Costs for sales and marketing during a period / total number of customers during a period
– For example, if a startup incurred $30k in salaries for the sales team and $10k in marketing material and acquired 5 customers
– ($30k + $10k) / 5 = $8k CAC
4. Payroll as a Percentage of Expenses and Sales
For many startups, their high costs consist of payroll and contractor costs. For pre-revenue companies, measuring payroll costs compared to the total expenses helps identify the amount of payroll and contractor costs compared to the total. A range of 70-80% of total expenditures is typical for startups – the remaining costs are related to SaaS costs, Selling, General and Administrative (SG&A) costs and other operating expenses. A reduction in payroll percentage can suggest that certain operational costs have begun to increase disproportionately and should be investigated.
Payroll as a percentage of expense is calculated by:
– Total payroll and contractor costs / total expenses
– For example, total payroll and contractor costs for a period were $800k, and total expenses were $1 Million ($800k/$1 million = 80%)
For startups who have begun generating revenue, a measurement of payroll compared to total sales helps identify how the growth and changes in headcount costs directly correlate to revenue. The percentage range will vary based on the point in a revenue life cycle and can be defined and measured under multiple fronts.
5. Gross Margin
Gross margins represent a startup’s profit from its core revenue generation activity. This excludes SG&A costs such as marketing, rent and other related operating expenses. As a startup scales, the gross margin will likely be negative, which is expected and normal. Continued growth in revenue will create an opportunity to obtain cost efficiencies which can inevitably lead to smaller negative gross margins and eventually positive gross margins.
Gross margin is calculated by:
– Total Revenue – Total Cost of Revenue
– For example, total revenue during a $1.2 million period and total costs were $1.5 million
– $1.2 million – $1.5 million = ($300k) gross margin
6. Cash Runway
Cash runway measures the number of months a company has until its cash runs out. The cash runaway can be calculated using anywhere from a simple calculation of the current cash balance divided by current cash burn (cash expenses less cash revenue), which relies on historical data, or a more complex calculation that depends on the cash flow forecast of cash expenses and revenues when projecting the projected cash burn rate.
Here is how the cash runway is calculated:
– Total cash balance at the end of the period / Total cash expenses during a period
– For example, total cash expenditures for during a period were $300k, and the ending cash balance for the period was $2.4 Million
– $2.4 Million ending cash balance / $300k cash expenditures = 8 months cash runway
Each startup has unique processes, and KPIs can be calculated in various ways. A trusted CFO partner ensures your startup metrics are consistent and relevant to your company. Withum’s CFO Advisory and Outsourced Accounting Systems and Services (OASyS) team provides that stress-free solution of a perfectly framed financial picture, saving companies valuable time and money. Every business’s needs differ based on their stage in the business lifecycle, so we tailor our services to fit exactly your needs.
We work with businesses of all sizes, from large organizations that prefer not to staff and manage an accounting department, to smaller entities or startups that need a 360-degree approach to direction and support.