3 Key Financial Metrics for Startups
Recently, I had a prospect come to me for advice.
He was very excited to start his business selling imported products through his Shopify account.
Initially his only concern was sales. He was throwing a significant amount of money at sales and marketing and had no idea that if he continued on his current path, he would run out of money in four months. He also didn’t realize that one of his products was accelerating the cash bleed.
Starting a business is incredibly exciting but can also be scary.
You’re stepping into the unknown. But the beauty of this journey is that you could be embarking on a new life filled with fulfilling work and prosperity. However, it’s not easy, and sometimes knowing if the company is doing well can be convoluted and confusing.
As a fractional CFO, there are three specific metrics I tell my clients to monitor right from the start to get the financial clarity they are looking for:
Burn Rate:
Yes, you have to spend money to make money, but it’s critical to monitor how much you’re spending versus how much cash you’re collecting from revenue. Note, I said “cash you’re collecting from revenue,” not just revenue. You can have a great product with sales through the roof, but if you’re not collecting on those sales, then you don’t have a business. The higher your burn rate, the longer it takes to be profitable. Keep burn rate as low as possible to show your business is sustainable.
Runway:
In line with burn rate, this metric tells you how long you have until the business runs out of money. It is calculated as capital on hand (money in the bank) divided by average monthly burn rate, resulting in the number of months left until you run out of “runway.” This is a critical metric because it determines when and if you need to raise capital in the form of debt or equity. Remember, the shorter your runway, the less bargaining power you have when raising equity.
Gross Margin:
Gross margin is revenue less the cost of goods sold (COGS), or the cost of revenue. It’s incredibly important to understand your gross margin when determining how to price your product. For a business to be profitable, you must have enough gross margin to cover the business expenses of the company.
These metrics are relatively easy to monitor and track as long as you keep up with the business’s financial transactions in your company’s accounting software.
Prioritize reviewing these metrics on a monthly basis. If the company is losing a significant amount of money, you may even want to monitor this weekly.
I suggest blocking off time each month to do a financial review to go over these metrics. This regular check-in will help you stay on top of your financial health and make informed decisions.
Back to my client…After spending time looking at the financials and the cost breakdown of each product, we were able to cut one product with a low margin and extend his runway by another three months.
This proactive approach helped him gain more time to focus on growth and sustainability.
If you need help monitoring, calculating, and understanding these metrics, it’s probably a good time to consider external resources to aid you and keep you accountable. By keeping a close eye on these financial metrics, you can navigate the early stages of your startup with greater confidence and clarity, ensuring you make informed decisions that drive long-term success.
If you're looking for expert guidance in managing your startup's finances book a free call with me to understand what you need and how a fractional CFO could help.
With tailored advice and hands-on support, you can achieve financial stability and position your business for sustained growth.
