7 Key Performance Indicators for Your Startup

How do you know if your startup is performing well? If revenue is the only area you’re focusing on, you may be missing other areas to track your progress. Here are the metrics you should be keeping an eye on for your startup.

What is a KPI?

First off, you may be wondering what a key performance indicator (or KPI) is. In short, it’s a way of measuring your progress in meeting a goal. Just as weigh-ins and measurements can help you stay in shape, KPIs keep you on track for financial fitness.

What Are Your Goals for Your Startup?

Maybe you don’t even know where to start with financial goals for your business. Here are a few for inspiration:

• Make enough money to cover all operating expenses
• Have enough cash flow for surprise bills
• Increase sales
• Decrease expenses
• Raise funds
• Get a business loan

Financial KPIs to Track

Using KPIs will help you reach any of the above goals, and more. Here are some KPIs you can ask your accountant to report back to you. If you’re real comfy with numbers, you can try calculating these for yourself. Most bookkeeping software will provide you with the data and reports you need.

Revenue growth rate

Your revenue growth rate show how sales are performing in different time periods. You can check your sales growth from month to month or year to year. Or compare this month’s revenue with the revenue from the same month last year.

Here’s the basic formula:

You have $200,000 in sales in 2020, and $300,000 in sales in 2021. 

300k – 200k = 100k. 100k / 200k = .5 or 50% growth.

Gross profit margin as a percentage of sales

Gross profit margin shows how much money you have left over after paying all the expenses for a product or service. The higher your profit margin, the more money you make per sale. This is a good indicator of the efficiency of your business.

Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100.

Net profit and net profit margin

Your net profit (or net income / earnings) is the bottom line on your income statement, one of the crucial documents in accounting. This tells you if your business is profitable. When this figure is positive, it means you are bringing in more money than you are spending.

Net profit margin measures how much net income is generated as a percentage of revenues received. Put simply, your net profit margin will tell you how many cents you make for every dollar you collect in sales.

What is the simplest way to calculate your net profit margin?

Take your net income from the bottom line of your income statement and divide it by your revenue. Multiply that by 100 to get the percentage.

Cash flow

Cash flow is the financial activities happening on a day to day basis for your business. A cash flow statement will help you with budgeting, show you areas of profit and loss, and help you come tax season.

You’ll want to create a cash flow statement that will show you several valuable metrics. This includes operating, investment, and financing activities, how much cash you have on hand, and how much cash you need to cover all expenses.

Here’s a free cash flow statement template from Quickbooks: https://quickbooks.intuit.com/accounting/reporting/cash-flow/ 

Accounts payable turnover

How often are you paying your bills? Your accounts payable turnover ratio will tell you. What valuable insights does accounts payable turnover provide? Investors will see if you have enough cash to meet your short term obligations. Creditors can use the ratio to decide whether to give you a line of credit. A decreasing ratio could alert you to financial problems. An increasing ratio could mean you aren’t reinvesting enough back into your business.

How to calculate:

Add the accounts payable balance from the beginning of the period to the balance at the end of the period and divide by 2. This gives you the average accounts payable. Then take the total of your purchases for the period and divide it by the average accounts payable.

Cost of goods sold (COGS)

COGS is the total expenses directly used to create your product or service. That includes labor and materials, but not overhead like rent and marketing. COGS effects how much you pay in taxes and how you price your products and services. Keeping an eye on COGS will help you find a balance between growing profits and taking advantage of tax deductions.

The basic calculation for COGS is: (Beginning Inventory + Cost of Goods) – Ending Inventory = Cost of Goods Sold. But there are actually 3 methods to calculate COGS that may be a better fit for you. Talk to your accountant for help.

Customer acquisition cost (CAC)

CAC is a metric that overlaps with marketing and sales. You may want to pull in your marketing and sales department for help monitoring this one. CAC shows how much money can be extracted from customers compared to how much it costs to acquire one. If the CAC is reduced, the profit margins go up.

To calculate your CAC, divide all the costs spent on acquiring more customers by the number of customers acquired in the period the money was spent. Here are a few examples of customer acquisition expenses:

• Advertising
• Creative
• Technical
• Publishing
• Production
• Inventory upkeep
• Marketing and sales team pay

7 Magical KPIs

These 7 key performance indicators should give you a good picture of your company’s overall health. Most importantly, they chart your progress to meeting your financial goals. Picture yourself at the helm of a big rocket ship control panel. These different KPIs are the meters showing your engine levels, speed, velocity, gravitational force, and more. Your job is to monitor the indicator lights and make adjustments to keep everything in the green.

Feeling overwhelmed? No worries. Reach out to the fine folks at Lin Company. Our accountants are professionally trained to keep your business in smooth sailing. We can help you track all the crucial KPIs that mean success and profits for your startup. Start a live chat to talk to a real accountant now, or contact us to get in touch.