If you run a start-up or are thinking about becoming an entrepreneur, you undoubtedly have thought about profit and loss statements and balance sheets. Those are important, and they are key to the financial success of any business.
However, start-ups have unique financial statement needs. Start-ups need key performance indicators (KPI’s) to MEASURE whether their idea should be a company or not. The typical financial statements are not going to create the measurements needed to validate a particular business model.
Start-ups also need to monitor cash flow more stringently than established businesses and they need to do it frequently. Below are 4measurements all start-ups should be tracking.
Start-Up Burn Rate – Burn rate is the rate at which a company is losing money. Hint: the lower the better. Whether you got your initial seed money from a group of investors or Uncle Sal, you need a metric that tells you how quickly you are going through it. The reason is clear: if you are running through your start-up cash quicker than you are making a profit, you will eventually reach the end of that road. You’ll run out of money.
Measurement of the start-up burn rate is simplicity itself. Calculate the monthly burn rate by subtracting the cash balance at the end of the month from the cash balance at the beginning. You can also do a yearly analysis by subtracting the cash balance at year-end from that at the first of the year.
Months of Cash Left – How many months of business do you have left before your cash is spent? This is one of the most important metrics. With a clear view of months of cash left, you can monitor your business’s viability, go for a new cash infusion, think about partnerships, or scale your business differently. This metric divides cash needed by how much cash is on hand. Note that cash does not include real assets or material you need to produce a product.
Cost Per Customer Acquisition Paid – How much does it cost to get each new customer? To calculate this metric, add up the full cost of sales and marketing in the period measured (including salaries and any cost related to headcount). Then divide the costs by the number of customers brought in over the same period. This is particularly important for start-up entrepreneurs who believe passionately in their products and companies. It may seem as if a rapturously happy public will obviously be buying tons of the product in a short time. Whether they are or aren’t, you need to know how much you are spending in sales and marketing to obtain them.
Time to Cash Flow Breakeven – When will the cash inflow actually equal the cash outflow? Cash flow breakeven is when the amount of cash required to be equal to costs and expenses occurs. Time to cash flow breakeven if the projected number of months to go before that occurs. You can pay your costs out of cash flow rather than seed money or revenues! When cash flow breakeven occurs, the start-up is no longer operating at a loss. Time to cash flow breakeven needs to be calculated frequently in start-ups, especially those that are seasonal or may have seasonal variations in sales. One month of cash flow breakeven does not mean that cash flow breakeven is going to be hit next month.
Use these metrics to verify how this business model is doing AND if you should continue OR pivot. Pivot means…. When your first business model isn’t working you go to Plan B. As mentioned above, some Plan B’s might include going to the market for more money, considering a partnership, or developing a different scale. Other Plan B’s may include restructuring the start-up or cutting costs.
A CPA can help you forecast and measure these KPIs, which are vital to any entrepreneur. Please contact us to discuss these are other metrics and their importance to your business.
Another item important for everyone, but startups especially is the effectiveness of their marketing. Otherwise called Traction. Traction is measured as the number of completed engagements with real customers. In other words, real sales, not potentials, but closed, in the bank sales. The real tracking you should be doing is measuring the activities that you do that result in traction. Why? Well, if you know something leads to something else you like, then you will likely do that something more often. Personally I like the results of traction so I do the stuff that results in getting the results that give me the “warm and fuzzys.” So, measure what leads to Traction and you’ll find you get more Traction.
Thank you for pointing that out!!!