10 Financial Metrics Every Startup Should Track
Whether you’re about to raise money, measuring KPIs, or planning for the future, there are certain financial metrics that every startup needs to know.
The last thing you want is to be caught off-guard when an investor asks you about customer acquisition cost, burn rate, gross margins or any of the fancy acronyms startups like to use (we have an entire glossary of those).
Beyond preventing potential embarrassment during your next pitch, the more you know and understand about your startup’s finances, the easier it is to spot issues early, answer tough questions from investors, and grow your business.
While the list of metrics you can track is long, we’ve narrowed it down to 10 financial metrics for startups to get started with.
Runway (a.k.a cash runway) is how many months your startup has before it runs out of cash. The longer your runway, the more time you have to build and grow your startup.
Your runway is determined by your revenue and expenses. If your monthly expenses are greater than your monthly revenue, you’re going to run out of cash eventually. Your runway tells you when “eventually” is.
Aside from the fact that your company literally needs runway to exist, this financial metric can also tell you a lot about your business.
For instance, a shorter runway means you’re either spending too much money or your revenue isn’t growing at a sustainable rate. In either case, you have a few options to extend your runway:
- Reduce your expenses
- Increase your revenue
- Get more funding
If you’re unsure of which route to take, we highly recommend you create a financial model with multiple scenarios.
Create a baseline model that predicts what your runway will look like if you stay on your current path. Then create alternative scenarios of what happens if your revenue increases, you decrease certain expenses, or if you raise funds. Then you can see the exact impact each change will have on your runway.
Here’s an example of a fictional company that currently has less than three months of runway. In the graph below, we can see that if they don’t do something by May, they’re going to run out of money.
Knowing this information, we can look into their financials and see where their biggest expenses are, or if they’re missing any opportunities to grow revenue.
When you track your runway, you can forecast, spot issues early on, and course-correct before things get out of control.
2. Burn Rate
Burn rate is heavily related to runway. In fact, you can’t calculate your runway without knowing your burn rate.
In simple terms, burn rate is the amount of money you lose per month.
For instance, in the screenshot above this company generated $39,750 in revenue in February, but had $53,446 in expenses, which gives them a burn rate of $13,696 (39,750-53,446).
When your monthly revenue is greater than your expenses, then you’ll have a net negative burn rate which is the ideal scenario for startups.
Keep in mind that burn isn’t necessarily a bad thing. It costs money to build a successful company after all.
Salaries, software, marketing, and other expenses all contribute to your burn rate. But they’re also all necessary to build a startup.
The problem comes when you’re burning too much cash or burning it too quickly.
For instance, let’s say you did a seed round of fundraising, so now you have $1,000,000 in the bank (a.k.a. cash reserves). Your startup’s runway will look dramatically different with a burn rate of $200,000 per month vs. $100,000 per month (a five month runway vs. a 10 month runway).
If your burn rate is too high or it’s shortening your runway, you’ll have to dive into what your biggest expenses are and see where you can potentially cust costs.
As much as we all wish money was unlimited, the reality is it’s not. And whether you’re bootstrapped or you have funding, burn rate is a financial metric your startup can’t afford to ignore.
Certain financial metrics for startups are table stakes. Revenue is one of them.
Revenue is the total amount of money your company gets from the products and services you sell.
While a lot of startups just look at their overall revenue, you’ll be able to get a lot more insights by breaking your revenue down by type (recurring vs. non-recurring) and source (products and plan levels).
Look at Salesforce for example. They offer over a dozen products, each of which generates a certain amount or revenue. In order to know which products to put resources towards, they need to know how much revenue they generate from each individually, and as a whole.
There’s also the classic scenario of SaaS companies with tiered pricing. Looking at your revenue based on plan level, and building a forecast based on the data can help you be more strategic about pricing, marketing, sales, and overall growth.
For SaaS startups or any type of subscription-based business, monthly recurring revenue (MRR) is a financial metric you need to know like the back of your hand.
MRR is the amount of recurring revenue you generate from subscription customers.
The beauty of MRR is that it makes your revenue more predictable than one-time sales.
For instance, if you have 1,000 customers paying an average of $50 per month, then you know your monthly revenue will be around $50,000 for the next several months (hopefully more as you get more customers).
Knowing your MRR also gives you a way to be smarter about expenses—particularly if you’ve built a financial model (hint: you can do this with Finmark).
When you build a financial model, you can account for potential growth, factor in churn and other variables into your MRR.
Here’s an example in Finmark. We’re building a forecast and want to plan for how much monthly growth we expect to see from monthly plans.
Using that data, you can gauge whether or not you can afford to hire new employees, pay for an ad campaign, or buy new software.
If you offer monthly subscriptions, MRR is going to be one of the top financial metrics your startup tracks.
5. Average Revenue Per Account
Average revenue per account (ARPA), is another important financial metric for startups.
It tells you the average amount of revenue you make from each paid account you have.
This is not to be confused with average revenue per user (ARPU).
While some people use the two terms interchangeably, they’re not quite the same. Depending on your business model, one account can have multiple users.
Let’s look at Slack for instance. They have a per-user pricing model.
If a company signs up for their standard plan with 10 users, the revenue from their account is ~$66.70 per month. However, the revenue from each individual user is $6.67.
That makes their ARPA and ARPU significantly different, particularly when you spread that across all of their customers.
ARPA plays an important role in your growth strategy and how you forecast for the future.
Here’s an example.
Two companies both currently have 1,000 customers. One has an ARPA of ~$125 (the pink line), while the other has an ARPA of ~$50 (the blue line).
Not only does the higher ARPA startup have more MRR, but their growth trajectory is much stronger (and faster) than the startup with a lower ARPA.
In order for the $50 ARPA startup to achieve the revenue levels of the $150 one, they’d need to acquire at least twice as many customers.
With that being said, when you’re setting KPIs your goal shouldn’t just be to get your ARPA as high as possible. It should be to maximize it according to your company’s goals and business model.
For instance, let’s say you’re a SaaS company with three different pricing tiers:
If your ARPA is $27, that means you’re not maximizing your revenue potential. Your users skew towards the lower pricing tier, so you need to look for ways to get more customers in the higher priced tiers.
Pay attention to your ARPA over time, and make tweaks to your marketing, sales and overall growth strategy in order to optimize this financial metric.
6. MRR Churn
We talked about incoming monthly revenue, but there’s also a flip side to that.
MRR churn comes from one of two things happening:
- Customers cancel their account
- Customers downgrade their account
When a customer cancels their account, all of their MRR is lost going forward. However, when a customer downgrades their account, you’ll only lose part of their MRR.
The biggest reason you need to keep an eye on this financial metric for your startup is because you’re losing revenue. Beyond that though, you need to track MRR churn monthly to spot negative trends early.
If your MRR churn rate is constantly growing, it means you’re either unable to retain customers, or customers don’t want to spend as much money with you for any number of reasons (typically their budget shrunk or they’re not getting enough value with their current plan).
In order to get insights that’ll help you reduce MRR churn, start asking customers why they’re canceling or downgrading their account. Then you can build a plan of action to retain more customers and revenue.
7. Customer Lifetime Value
Customer lifetime value (LTV) is a very important financial metric for startups with a recurring revenue model.
LTV tells you the average amount of revenue you can expect to collect from a customer before they churn.
LTV takes into account monthly revenue and the average subscription length for your customers. In order to optimize this metric, you need to:
- Increase the amount of revenue customers spend with you
- Keep customers happy (and paying) for as long as possible
Arguably the most important reason startups should track LTV is to understand how much you can afford to spend to acquire customers.
For instance, if you have an LTV of $1,500, you can afford to spend more to acquire a customer than a company with an LTV of $500.
By itself, LTV is a helpful metric. But in order to give it even more context, you need to compare it against the next financial metric on our list…
Customer acquisition cost (CAC) is the average amount of money you spend to acquire one new customer.
What exactly gets included in CAC?
Simply put, any marketing and sales costs associated with acquiring customers. That could mean:
- Advertising spend
- Marketing and sales employee salaries
- Sales and marketing software
- Marketing materials
CAC can literally make or break your startup. And while you might assume your goal should be to spend as little to acquire customers as possible, it’s not quite that straightforward. It’s more like a balancing act.
Spend too much to acquire new customers and you’ll eventually run out of money. Spend too little and you’re not maximizing your efforts.
The trick is to find that sweet spot when you’re spending enough to make money, but also enough to get the highest quality (and most) customers.
I mentioned it above, but CAC and LTV go hand-in-hand. In fact, there’s an entire financial metric dedicated to the relationship—LTV:CAC ratio.
LTV:CAC ratio compares the average lifetime value of a customer to the average amount of money it costs you to acquire those customers.
If your ratio is 1:3 for example, that means you’re spending 3X as much to acquire customers as they bring in over their lifetime. The closer you get to a 1:1 ratio, the more likely it is that you’re spending too much to acquire customers.
You should constantly test and tweak your strategy to find the optimal CAC. Also, compare CAC by channel (Google Ads, Facebook Ads, trade shows, etc.) to find out where to put your marketing and sales dollars to have the biggest impact.
9. CAC Payback
The third part of the CAC and LTV equation is CAC payback.
Your CAC payback period is the number of months it takes you to recoup your customer acquisition costs. In other words, how many months it takes you to “break even”.
The shorter your CAC payback period, the sooner you start making money from a newly acquired customer.
A long CAC payback period combined with a high CAC and low LTV is a recipe for disaster. In non-acronym language, it means you’re paying so much to acquire customers that you’ll never be able to recover the money you spent before they churn.
It’s nearly impossible to build a sustainable business that way, which is why looking at all three of these financial metrics for startups are so important (CAC, LTV, and CAC payback).
If you’re able to get them right, you’ll have a much smoother growth trajectory and won’t constantly be concerned about your cash runway. It’s a much less stressful position to be in.
Like all the metrics on this list, the sooner you start tracking CAC payback, the more data you’ll have to make informed decisions.
10. Gross Margin
As a startup, it’s easy to get fixated on revenue and completely ignore the money you spent to make it happen. Gross margin paints a more realistic picture of how much revenue you’re really generating.
Similar to what we talked about with CAC, if you’re spending more money to produce and sell a product than you’re getting in return, you can’t grow (not long term anyways).
Depending on who you ask, a “good” gross margin for SaaS companies is anywhere from 70-80% or higher. If yours is lower, don’t be alarmed. It doesn’t mean your business is sinking or that it’s time to throw in the towel.
There are a number of factors that play a role in your gross margin. From the age of your startup, to the products you sell, and more. You just need to analyze what’s going on.
When you’re looking at gross margin, pay attention to the ratio of revenue to COGS. The only way to improve your gross margin is to improve one or both of those financial metrics.
- Is there anything you can do to lower your COGS?
- Are you maximizing your revenue?
Really dig into your revenue and expenses to understand what’s going on behind the numbers (hint: Finmark can be helpful here).
Are You Tracking The Right Financial Metrics for Your Startups?
All of these metrics are important to gauge the financial performance of your startup. While there are plenty of others you can track, the metrics on this list will give you a good foundation to build on.
From revenue to expenses, retention, and more, start tracking these financial metrics for your startup to get deep insights into your business, and never be caught off guard.
And if you’re looking for a tool to track them all, give Finmark a try with a free 30 day trial!