Category: Business Metrics

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Important Financial Metrics and Equations for a Startup

As a startup, you have to take up a lot of challenges. Among the different challenges that one may have to face, managing the finances efficiently is one. You need to manage your expenses and divert your savings in such way that you are able to make a further investment with the savings.

Thus, for any startup, it is important to understand the financial metrics. Here it is for your reference.

Sales

Managing sales is important as it earns revenue for your business. Things you need to consider are:

Revenue run rate, that is how much has your income increased over last year. Is there sufficient increase in comparison to the investment made?

Next, consider the Average Revenue per user or ARPU. It will help you understand how different client is contributing towards your revenue. Is there different segment among your client base? Which customers are providing average contribution and which segment needs a further push.

Marketing expenses are your most important external expense. Thus, it is important to know how much are you allocating there and how much return are you getting to that.

Client Base and Scalability

Once you have an idea about the ARPU you will be able to know Customer acquisition cost or CAC. It is important to know as with it you can decide whether you will scale up now or wait for the CAC to be better.

It is also important to understand that whether you will retain it, customer? Is it costly to retain a customer or get a new customer? Depending on the figures that you get you can decide what customer policies should be introduced or changed.

Finance/Cash Flow

Finally, it’s time to look inside the business.

Know the Burn rate that is what is the number of time you are enjoying the current level of sales? Are you at break even or have started earning profits? It is a practical way to understand when it is the right time to scale up.

You also need to track the Selling, General and Administrative Expenses (SGA) ratio to the sales figure. It is important to judge out that how much profits are you able to earn for certain level of expenses. If you can know about the revenue per employee you can actually work on the whole thing.

You will come across terms like Earnings before interest, taxes, depreciation, and amortization. EBITDA is a figure from which you need to deduct respective expenses so that you get the gross profit, another important metrics in finance.