Farseer dashboard showing financial KPIs
What Financial KPIs should every startup plan and track?
Startups need time to get to noticeable recurring net revenue and show a high growth and scaling potential. Otherwise, they don’t get venture capital. The time that a startup has is called the cash runway and this post will go into some of the most important things early-stage startups should plan and track, to make sure they survive and thrive.
Cash runway is a simple concept, but it can cause nightmares if not planned and tracked properly. In the early phases, your main objective is to keep your head above the water. All metrics, KPIs, and efforts should be in service of this “simple” task. Lousy runway planning is what takes down about 30% of startups.
This was just to scare you and to keep you reading, we will come back to the cash runway at the end of the post :)
To keep your runway in check, you’ll need to focus on revenues, expenses, and your cash flow. Here are the most important KPIs for all of these.
This one is obvious. Being aware of your revenue situation enables you to play with other important business variables - pricing, discounts, operations, etc. 3 main revenue KPIs are:
Amount generated from the sale of your services before any costs or expenses are deducted. This KPI is less relevant in the SaaS context though, so you should probably pay more attention to recurring revenue explained in a moment. Still, total revenue prolongs your runway, so it’s very vital.
How to calculate: Annual recurring revenue + Other non-recurring revenue (setup fees, consulting fees, etc.)
Monthly Recurring Revenue (MRR)
In SaaS startups, which sell subscriptions, MRR (Monthly recurring revenue) is more important than total revenue because it tells you more about the short term situation. It’s consistent, predictable, and gives you insight into your startup’s momentum, so you can forecast everything precisely. MRR and ARR (Annual recurring revenue) are often used interchangeably.
MRR represents the new accounts coming that month, multiplied by their average revenue (ARPA).
How to calculate: Total Revenue = Number of new accounts x ARPA
We do all our planning and reporting in Farseer, and we found that it’s best practice to plan for ARPA and the number of licenses per account separately. This way, you can see how changes in any of the two variables impact your revenue (more on that in the upcoming blog posts on what-if scenarios).
Net recurring revenue
The most important revenue KPI. It tells you about the monthly value of newly acquired accounts and monthly added value to current accounts, minus the value lost from closed or reduced accounts. This KPI provides the most insight into your revenue situation - it’s calculated considering all the accounts you lost, the ones that lost parts of revenue, all the new ones, and upsells to existing ones. Investors love startups being able to control the Net recurring revenue.
How to calculate: Existing MRR - Lost MRR + Upsell/Cross-sell MRR
To put things into perspective for investors and to benchmark with your fellow SaaSians, consider including subcategory KPI for Net revenue retention Rate. To get it, you simply divide the formula above with recurring revenue at the beginning of a period.
A Company has 20 accounts, each paying $1,000 per month. At the beginning of the month, MRR is $20,000. During that month, they get 3 new accounts paying $1,000, 2 accounts cancel subscription and 2 accounts increase ARPU from $1,000 to $1,500.
Net revenue retention rate = ($20,000 + (3 x $1,000) - (2 x $1,000) + (2 x $500) ) / $20,000 = $22,000 / $20,000 = 110%
Obviously, you want your Net revenue retention rate to be >100% since that indicates growth. Usually, a successful enterprise SaaS benchmarks around 125%.
Being in a startup is all about growing your revenue as much as possible while minimizing churn. (Easy, right?) So we will not go too deep into the expense domain.
There is a single cost-related KPI that you will focus on the most as a SaaS:
Customer acquisition cost (CAC)
CAC represents the costs of acquiring new customers by adding up sales and marketing costs for a given period and dividing them by the number of new customers for that period. Investors will want to know about this to check the scalability of your business model.
How to calculate: CAC= (Total marketing expenses + Total sales expenses)/# of new customers
Even though this is not an expense KPI, let’s squeeze it in here since it’s not very busy in the Expense category. Lifetime average revenue per account compared to the average cost of acquisition - investors will ask about this one. Most commonly, this ratio should be 3:1, meaning if it costs your startup $1000 to acquire a client, they should generate at least $3000 in revenues.
Cash Flow KPIs
The final piece of the SaaS KPI puzzle is the cash flow. For startups, gross profit is not as important as planning the cash flow. The priority is to have enough cash to get to the next milestone, most commonly the next round of financing. To get a useful overview of your cash flow and keep it healthy, you need to mind these variables:
Cash IN from operations - money coming from your clients
Cash OUT from operations - money you’re spending on various costs
Cash from financing - VC funds, bank loans, personal money you invest in the company...
Adding these three together gives you your cash balance:
Cash balance = cash in - cash out + cash from financing
I mentioned the importance of runway planning earlier, so here are the two most important runway/cash flow KPIs:
The burn rate is cash spent per month. That cash comes from all your expenses summed (salaries, overhead, direct product costs…). For example, if a company is said to have a burn rate of $150,000, it would mean that the company is spending $150,000 per month.
Again, make sure to plan at least a year ahead and not just report on the burn rate. Otherwise, you might find yourself falling down the startup abyss screaming: “This is the end of our runwaaaaay”
Cash flow runway
This KPI tells you how much time you have on your planned burn rate before you go through all your money. It’s most commonly expressed in months.
How to calculate: Cash flow runway(months) = planned cash balance / planned monthly burn rate
A long runway is great, but your goal is to lift off ASAP.
Other related KPIs
If you want to be serious about your financials, planning and tracking KPIs I described above is a must. Spending time on setting up and calculating them properly is extremely useful for your startup. If your investors see that you understand these and that you’re serious about planning them, it will help you land some more money. And you’re all about that seed money, right?
I’ll just mention some of the other KPIs related to the ones I talked about earlier. Some of them will be more useful in the later phases of your company, and some of them give you additional insight into stuff I talked about earlier.
ARPA(Average revenue per account) - calculated by dividing your total monthly recurring revenue (MRR) by the total number of accounts. This can easily be converted to a yearly metric by replacing the MRR with annual recurring revenue (ARR).
Revenue growth rate - month-over-month percentage increase in revenue. It tells you how fast you grow.
Activation rate - the percentage of users who complete a certain milestone in your onboarding process.
Churn rate - customers that don’t renew the subscription within a given period.
Net MRR churn - the measure of lost revenue from downgrades or cancellation, after factoring in the revenue from existing customers
LTV - average revenue for a single account from acquisition to churn
NPS (Net promoter score) - number of satisfied customers and the average degree of customer satisfaction.
You need to plan, and not just track your KPIs
In the early phases, your cash flow runway is a priority
The most important KPIs for SaaS startups: MRR, Net recurring revenue, CAC, LTV/CAC ratio, burn rate, cash flow runway.
Understanding and using these will get you funded.
As an early startup, this is what we do. And we're doing pretty good if we might say so ourselves.