Over the years I have been very fortunate to work with some of the most successful startups throughout Arizona and the Southwest. Starting a business is challenging for many reasons but maintaining focus on the true opportunities in an environment of perpetual change can be particularly difficult. Establishing meaningful key performance indicators (“KPI’s”) is something every startup should have in their war chest.
What are KPI’s?
The Oxford’s Dictionary definition of KPI is “a quantifiable measure used to evaluate the success of an organization, employee, etc. in meeting objectives for performance.” More simply, KPI’s are measurable data that inform you on where you are relative to your goals. In the high energy, constantly changing, world of startups, KPI’s can be used to establish a disciplined focus on a company’s true growth opportunities.
What KPI’s should you focus on?
If you Google “KPI” you will get a sense of the endless number of performance measures that are available. In the startup community the alphabet soup of acronyms used to pitch or describe a company can be hard to keep up with. Below are the KPI’s that I think are most valuable for early stage companies.
- Churn Rate – Churn rate represents the percentage of customers that were lost in a given period. This metric is essential for customers with recurring revenue models. For any business that is looking to grow, retaining customers is paramount. Monitoring a business’s churn rate can help shed light on product, pricing or execution issues that need to be addressed for your business to achieve growth/scale.
- Burn Rate – In order to grow, startups need to raise and subsequently spend cash. Burn rate represents a company’s rate of negative cash flow, and how quickly the cash is going out the door. Burn rate is critical to managing growth and allows founders and investors visibility into when a startup will need additional financing. Fundraising takes time and no startup should be desperate when pitching to investors. Monitoring your burn rate will help you avoid this dilemma.
- Customer Acquisition Costs – CAC or how much time and money it takes to acquire customers is a KPI that startups should closely monitor. All industries are different in terms of how they acquire their customer base, but one thing all businesses have in common is that they all want to acquire customers as quickly and at the lowest cost possible. Managing your customer acquisition cost can lower a company’s burn rate and aids in achieving financially healthy growth.
- Revenue Growth Rate – This may go without saying, but as a startup in growth mode, monitoring revenue growth rate is critical. This can be done in a number of different ways, but in its simplest form this KPI represents the month over month percentage increase in revenues. This is the best measure of how well you are managing your top line growth and is a critical measure in how an investor will value your business.
- Gross Margin – Gross margin is an oldie but goodie. Gross margin is the percentage a product or service costs compared to the revenues a company earns for selling that product or service. The higher the gross margin, the more money you make from selling your product or service, giving you more money to develop and market new product or services, or more money to cover overhead and administrative costs.
A final word
Establishing the right KPI’s can be valuable tools a startup can employ to manage their business and its growth. KPI’s can be applied to all aspects of a business and can at times be complicated. Keep your indicators simple and focused on the measures that are most impactful for your industry, business and performance goals..
If you have an accounting question, don’t hesitate to contact a Henry+Horne professional adviser.
Steve Pope, CPA