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What are the most important financial metrics and equations for a startup?

startup financial metrics & benchmarks

Answers

Barron HUghes
Title: CFO
Company: Snaps, Inc
(CFO, Snaps, Inc) |

There are a couple that I find important:
1. DSO- Days sales outstanding on AR & AR Aging % greater than 90 days.
2. Cash Flow statements on a bi-monthly basis. A short-term and a long-term analysis.
3. Comparing actual to budget & prior year in regards to a lot of P&L items (Revenue, GM, Operating Income, etc.).
4. Revenue per FTE (For SW companies I find that $150k per FTE is breakeven and $170k and above your company should be making money.
5. Metrics on your sales staff. "Funnel" reports to monitor their customer cycles. Don't wait until 12 months from now to find out that this sales rep is not going to make it. The sales funnel should be moving along in the cycle or it shouldn't be there.

These are just a few.

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

In addition take a look at annual cash compensation costs (fixed base salary and annual variable cash) versus long-term compensation (equity) costs.

Topic Expert
Henry Schumann
Title: Manager FP&A
Company: Allscripts
(Manager FP&A, Allscripts) |

To properly answer the question, it would be helpful to know in which industry the start up is or planned to be. There are different sets of metrics depending on whether the business will be product based or services based.

However, in either case, performance against a cash budget is critical. In almost all start up situations, cash flow is negative at the beginning and has to be compared to cash available from all sources (owner's cash, investor cash, credit lines and term loans).

Then from a longer range view, is the company on track to become cash flow positive in "x" months/years?

Topic Expert
Randy Miller
Title: Partner
Company: CFO Edge
(Partner, CFO Edge) |

I agree with Henry, dependent on the industry, some of the KPI's will change. Generally unless you are backed by a Fortune 100 company, the cash burn rate is the most critical measurement in a start-up. Next is your timeline for actual revenue generation - staying on top of your timeline for going live with product or services and how delays impact your burn rate and cash flow planning. Most start-ups underestimate both of these issues and end up scrambling because of it.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

I like these for FINANCIAL metrics for manufacturing and retail:
Direct margin percentage.
EBITDA [earnings before interest, taxes, depreciation and amortization] divided
by invested capital
Net income plus depreciation and amortization divided by debt [current and non-
current]
For retail, add percentage of sales sold at full price ["sell through"]

For other industries, other metrics are crucial, like "net interest margin" for banks.

A few critical operating metrics are also very desirable,

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I have used:

Current Ratio
A/R Turnovers/Avg Collection Period
A/P Turnovers/Avg Collection Period
Inv Turnovers/Avg Collection Period
Working Capital

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

For a start-up there is only one area that maters - "Cash Flow." As previously stated, there are all sorts of ratios that can be used, based on the your business model. But your overall focus should be your Receivables less your Payables.

Sanjeev Makker
Title: Entreprenuer
Company: The Platinum Clusters Inc.
(Entreprenuer, The Platinum Clusters Inc.) |

For a start up one will not be able to define and compute the standard ratios as every time you compute you will get a distorted picture since one will be in different stages of the growth life cycle. The start up model has to define when and how many and how quickly will the start up be able to get customers rolling which means how soon can you have your cash flows coming in even if you are making a loss initially. "Cash is King". Further,if you are funded by the angel investors then, their criteria of evalutation will also define a framework on how your business needs to be measured and monitored

Doug Neeper
Title: FP&A - making better decisions
Company: DFN Consulting
(FP&A - making better decisions, DFN Consulting) |

I must say I agree with Regis Quirin; I'm freshly reminded of the value of cash and the need to control both what comes in / goes out. To this end, for startups, rather than waiting until cash or lack of cash is an issue, I'd highly recommend 'stringent' oversight / attention to who owes you what and restrict to the highest possible extent possible commitments to spend $. Focusing on both of these will make your cash last longer, and heighten the possibility of enterprise success.

Topic Expert
Dana Price
Title: Vice President, M&A
Company: McGraw Hill Education
(Vice President, M&A, McGraw Hill Education) |

If you are an early stage startup it’s cash and burn rate. Number of customers/users/uniques, sales closed, and how much committed in your fundraising efforts are also important.

CV Sudarshan
Title: Sr. Executive
Company: Gorilla Expense
(Sr. Executive, Gorilla Expense) |

There are different KPIs for different stages of the startup. In general, cash flow is always #1. It is also important to understand when the company will turn cash flow positive (how many months/years?). Investors are also keen on keeping a pulse on the monthly burn rate. If your product/service is out there and marketed to customers, KPIs such as number of leads, funnel analysis reports, converted sales, revenue etc. become valid.

Topic Expert
Mike Caruana
Title: Director of Financial Services
Company: Diamond Resorts International
(Director of Financial Services, Diamond Resorts International) |

I agree with what's been posted, particularly around keeping a close on on Cash Flow (both inflows and outflows). Most young companies don't have the credit facilities to get through prolonged cash droughts.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

An additional financial metrics, if you are in the construction industry, is knowing your bond working capital. Calculate by adding cash, contract receivables excluding A/R over 90 days, retainage receivables, cost in excess of billings, less total current liabilities, then multiply the results by 15.

Phil Solk
Title: Managing Partner
Company: Opero Partners
(Managing Partner, Opero Partners) |

I co-chair the software committee for the largest investor angel investment group. We want to see a strong sales pipeline to support the inevitable hockey stick revenue projections start-ups show for fund raising. Here is a short article on "Highly Accurate Sales Forecasting" https://www.proformative.com/b2b-directory/opero-partners/whitepapers.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

While I agree with the above for companies which develop and sell products , If you are in the b to c internet space you want to look at metrics such as

Monthly unique visitors and growth
Time spent on site which measures engagement
Purchase conversion rates
Average Dollar spending
Customer acquisition costs

Rick Hilker
Title: Managing Director
Company: Arkadia Network Solutions
(Managing Director, Arkadia Network Solutions) |

You have been provided with great suggestions. After nearly 20 years of start-up experience, the most important requirement is the quality of the management team especially the CEO and or President. Great ideas with a not so great team will not survive, average ideas with a great team can make a fortune. Specific metrics you seek depend on the business venture however, cash-flow management and cash-flow forecasting are a must.

Phil Solk
Title: Managing Partner
Company: Opero Partners
(Managing Partner, Opero Partners) |

Totally agree. Angel investors always bet on the jockey first.

Rudy Fischer
Title: Partner
Company: RKFischer & Associates
(Partner, RKFischer & Associates) |

Nothwithstanding the people discussion above, to me it depends where in the life cycle a start-up is. Cash is always king and you always need positive working capital - that's just a given. I think you will get different metrics depending upon 1) if the start-up is looking for further investment (and it depends upon the investment type), versus 2) a start up that is shooting for market growth, versus 3) a start up that is about to launch its product, versus ...

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