Nov 20, 2020How to Turn Financial Statements Into Your Secret Weapon
As a startup, you might feel like you’re playing catch-up with finances. Traditional measures like balance sheets and profit and loss statements, though insightful, can be too lethargic for a fast-paced startup. By the time something shows up in them, it’s usually too late to act.
Today we’re pulling out the defensive team and letting the offense score some points. Here are some simple financial metrics to use that will allow you to get ahead of the game.
- Cash Burn
Startups often fail because they underestimate the time it takes to raise capital. And to be frank, many underestimate their expenditures for the first several months. The combination can lead to catastrophe.
Our first metric, burn rate, shows how fast you’re spending your cash. It’s usually expressed as a monthly amount. Consider it the quick and dirty birds-eye view of financial health.
Take your cash spend from the last month from your P&L. Adjust for any future expenditures (like hiring a new employee) and for abnormal previous purchases (a one-time printer purchase).
2. Cash Runway
This projection is a sister to the cash burn metric, because it projects how many months of operation you can finance in your current situation. It’s pretty simple: With $10,000 in the bank and $1,000 in month expenses, you have 10 months of runway even if you don’t earn a cent of revenue. In the worst case scenario, this is how long a firm could operate before sinking underwater.
3. Net profit margin ratio
A.k.a. “Profit margin.” This number reflects the incoming profit for each dollar of revenue. If it’s over one dollar, you’re overspending. This metric gives insight on whether to cut expenses or stay the course on your current expenditures.
On the income statement, subtract cost of goods sold, operating expenses, interest on debt, and taxes from revenue. Divide the total by revenue and you have your profit margin.
4. Recurring revenue
Not all startups have monthly recurring revenue (MRR), but if you do, you need to track it. Want to feel secure in the success of your future? Track MRR. Want to impress investors? Track MRR. Want to show off to your mother-in-law? Still MRR. You get the idea.
How to calculate:
Separate out monthly recurring revenue generators from other types of revenue and separate that out on your income statement to get a picture of what your reliable sources of revenue are.
5. Customer acquisition cost (CAC)
If you want to know what something in business means, say it slowly. Customer acquisition cost is no exception.
This is a great metric when trying to understand how quickly you can scale the company. It answers what your advertising cost should be and if you should offer discounts.
To calculate CAC:
This is the simplest CAC measure. Take your total monthly acquisition cost (includes everything you’ve spent on customers, such as advertising, referral fees, discounts, etc.) and divide by the total number of new customers across all channels for the month.
The deeper you dive into startup metrics, the more you’ll uncover. The beauty about these calculations is that you don’t need a balance sheet or income statement. As a startup, you may find yourself with limited data and resources. By using these tips and a trusty calculator, you can be at the top of your game.