Editor’s Note: Here’s a story from our archives we feel is relevant even today and deserves your attention.
Not spending enough time gauging your business’s progress can be just as harmful as wasting your time with needless emails or Excel sheets. You may be so focused on getting your business to the next level, chasing funding and finding the right talent, that you are ignoring developing metrics to monitor your success.
But without strategic planning, you’re lost. And you can’t plan if you have no frame of reference for where you are.
I’ve found that these seven metrics (which roll up into three top-level categories: sales metrics, customer metrics and finance metrics) are good starting points.
Sales metrics: creating a growth engine
Revenue run rate. As you start to grow your business (develop a working product, gain customers and execute on your plan), you need to start measuring how your business is scaling. Your revenue run rate measures how sales are developing over time. It helps you see how likely you are to hit your forecasts, captures directional trends, picks up patterns (e.g. seasonality), and can tease out potential problems with your pricing strategy.
ARPU (Average Revenue Per User). Your ARPU is a measure of a customer’s average contribution to revenue. A rising level means you’re getting more sales from each customer and/or you have pricing power. Of course, that’s just a starting point. An average can’t tell you anything about the quality of your sales. We all know that some customers are more valuable than others! You need to get really granular and look at how sales break down by channel and customer type so you can tease out trends and devote resources to optimizing your customer mix and boosting your share of wallet.
Customer metrics: Building traction
CAC (Custom Acquisition Cost). Do you know how much it costs you to attract each customer? That’s what your CAC will show you. It’s a good way to monitor how efficient your sales process and sales team are. If the proportion of spend to impact is not improving over time, you need to make some changes.
Churn rate. How sticky is your customer base? Your churn rate shows how well you hold onto customers. The absolute value is important, but again, so is the trend. It should descend over time. If it suddenly spikes or plateaus at a high level, you need to figure out why. The numbers will be your guide.
(There are a wealth of other customer metrics that feed into these high level ones: How long on average do your customers stick with you? How profitable are they? How do they vary by sales channel?)
Financial management metrics: Cash flow
Burn rate. Staying on top of your burn rate (how much cash goes out the door every month) is critical. In my experience, running out of cash is the number one reason startups fail. It’s also an important focus for investors. Knowing your rate is like looking down the track towards a finish line with the stopwatch running. You need to know how much time is left before you run out of money, how close you are to breaking even, and when you’ll start generating profits.
Operation efficiency. How much operational efficiency does your startup have? In other words, are you getting a return on your spending or are you shortchanging your business by underinvesting in critical but low profile areas? The ratio of SGA (selling, general and administrative expenses) to sales will give you a picture. You’ll have discretion in areas like sales, marketing and payroll, but not for expenses like overhead and utilities.
Low margins could signal that your cost structure is out of whack, that you’re spending too much to get the business to scale, your pricing is too low, or a combination of some or all of the above. Outsourcing as much as you can is one way to get a handle on some of the biggest drivers. But when you’re just ramping up, you’ll need to spend more on sales and marketing to get traction. Spending in the right proportions will deliver the most bang for your buck. The results will eventually show up in your sales and cash figures.
Gross margins. Your gross margins measure your operating profitability. Both the level and the trend are important. You should know what kind of gross margin is typical for your industry so you have a sense of where you stack up. Operating margins may not be meaningful yet (you might not be making any profits), but they’re a good goal. Gross margins will tell you how effective your management, sales and customer teams are at driving the business, what stage of the curve your business is in, what operating levers you can use to drive growth, and how close you are to inflection points.
These seven metrics are just a start. It makes sense to compare yourself to companies operating in the same industry and of similar size and stage of development, if you can get the data. But to really be valuable and help you achieve your milestones, you also need to come up with measures that are specific to your business.
David Ehrenberg is the Founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with day-to-day transactional accounting, CFO service, tax, and valuation services and support. He’s a financial expert and startup mentor whose passion is helping businesses focus on what they do.
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