Fernway DiarySM

Aug 11, 2022

Key performance indicators (KPIs) are a critical tool for startups pursuing growth and improvement. Without quantifiable data to keep founders and investors informed about where a startup stands relative to its performance objectives, it is difficult to make the strategic decisions necessary to take advantage of growth opportunities or course correct when required. When used effectively, KPIs can provide objective information for decision makers and meaningful insights into the economic health of an organization.

One of the challenges for startups is knowing which KPIs will be of most use for their unique situation, as there are many different variations of performance measures to choose from. It is not necessary, or even advisable, to parse available information in every possible way; instead, startups should choose KPIs that are relevant to their business model that can be consistently measured to provide ongoing insight into operations and progress. Some valuable KPIs include:

Burn rate and runway: These related KPIs focus on how much cash a startup has on hand and how quickly it is being spent. Burn rate is a company’s rate of negative cash flow (for an expanded discussion of this KPI, see our previous article here). While it is normal for a startup’s expenses to exceed its revenue, especially in early stages, it is essential to monitor this figure as it gives visibility into when additional financing will be needed. Runway refers to the amount of time a startup has at its current burn rate before they run out of cash on hand. In general, startups should have 12–18 months of runway available.

Churn rate and customer retention rate: Retaining customers is important for businesses that are attempting to scale up and capture increased market share, especially those that operate on a recurring revenue model. Churn rate is the percentage of customers who were lost in a given period, while customer retention rate is the percentage of customers who remain loyal to the company after a certain period of time; these measures are essentially two sides of the same coin. Monitoring churn rate can help raise timely red flags on product, pricing, or execution issues in need of correction, while knowing customer retention can assist with more accurate sales forecasting.

Customer Acquisition Cost (CAC): Ideally, businesses would like to acquire new customers quickly, at the lowest possible cost. Customer acquisition cost measures the sales and marketing costs over a given period and divides it by the number of new customers acquired in that time to determine the estimated cost of acquiring a new customer. Managing CAC effectively can help lower burn rate while still achieving healthy growth.

Gross Margin: To find gross margin, subtract the direct costs of producing your product from the revenue generated by sales of that product, divide this figure by the revenue, then multiply by 100 to express it as a percentage. The higher the gross margin, the more money is made from selling the product or service, providing more funds for development, marketing, overhead, and administrative costs.

Revenue Growth Rate: In its simplest form, this KPI measures the month-over-month percentage increase in revenue. Knowing how well a startup is managing its top line growth is essential for maintaining a positive trajectory, and will be an important factor in how potential investors value the business.

Total Addressable Market: This measures a company’s target audience and market size to help determine the number of customers they could attract. This KPI is important for ascertaining a startup’s growth potential and will require doing market research. A well-thought-out analysis can enhance a startup’s understanding of their target market and communicate that understanding to potential investors.

In the current challenging funding environment, startups should demonstrate to investors a comprehensive understanding and tracking of KPIs that are both relevant and insightful to their business, and decision-making capabilities. Expert advisors can help assess and monitor KPIs specific to the startup’s industry, business, and performance goals. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to ensure your startup has what it needs at each stage of its growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.