“The Acuity Way” is a blog and video series we’ve developed, focused on providing entrepreneurs with simple startup bookkeeping and accounting tips to start off (or get back on) the right track.
Follow along with Matthew May in the video and transcript below for startup KPIs – How To Track Your Business With Key Performance Indicators.
The video should answer two key questions for entrepreneurs:
- What are the key financial metrics for startups to track?
- How do you evaluate startup performance?
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Hi I’m Matthew May, @TheTechCPA from Acuity. Today we’re going to be answering your FAQs about KPIs – because that’s not enough acronyms for you!
Key performance indicators are a big way people track their business, so let’s talk about some of the things that you might want to think about.
One of our strategies is to identify the most important things to your company. Most companies like to track cash because cash is king. The second thing they like to track is also related to cash because cash is king (so it gets two of ’em) – cash burner surplus. So, how much are you spending or burning a month?
The next things that we see most people track are revenue, customer acquisition cost (CAC), lifetime value of a customer, and then a kind of a one bonus is the Rule of 40.
So, let’s talk about each one of those things and where you should dig in a little bit.
For cash and cash burn, those are just the change in your bank balance month over month, and those are two really important things to track. The nice thing about that is those are financial metrics that we can plan on.
For your revenue metric, it depends on what kind of business you’re in. You’re either going to track your total revenue last month or your monthly recurring revenue, just totally depending on your industry and what’s likely to be tracked, but it’s really important that you track how much traction you have each month. You figure that out over time.
Customer acquisition cost is an important one to track. That’s where you take all of your expenses for acquiring customers – I like to include people, salaries, and all the direct spend that I have trying to acquire customers, and I divide that by the number of customers that I acquired in a month.
Lifetime value of a customer – you basically take the number of months that you expect to have the customer. You multiply that by the average revenue for a customer, and then you multiply that by your gross margin percentage – so, how much you make. It’s really important that you take into account your gross margin, or that’ll throw off the lifetime value calculation altogether.
The Rule of 40 is a really interesting metric. It’s a great one to track and to think about. It’s one that’s very popular right now, but it considers two really important things: your level of profits and your growth rate. So, not all things are equal. If you have a company that has a 20% gross profit line item, but is not growing, that’s a different value than a company that’s growing 20% a year and has a 20% profit.
That’s one of those metrics that I think that’s a really valuable metric to track because there are several things going into it. It’s a good high level metric, just like CAC and lifetime value of a customer. Those three really take into account a lot of things going on at the same time.
So, when we’re thinking about which 10 things to capture, when you look at a metric, if you put it on your dashboard, is that going to make you change your behavior? Is that going to show you where you are globally compared to other people?
These are really important questions to ask yourself because we really only want to be focusing our time on tracking metrics that matter – metrics that are going to impact the way that you work and think about your business.
Hopefully you found this helpful on startup KPIs. We’ve got more on simple tools that entrepreneurs can use to make doing their financials easier. We’ve got two videos about understanding your books – one about income statements and one about the balance sheet.
And we talk a lot about taxes and the different tax issues that pop up, so check those out. If you don’t find something that you are looking for, or you have a question, please shoot us a note on social media. Maybe we’ll make a video for you! Have a great day.