It is essential for any startup founder to have a basic understanding of certain figures. Whether fundraising or designing your business’s financial management, it is as simple as this: know your numbers or your business may falter. Eight years of experience in financial statement analysis have taught me one essential thing: everyone wants you to understand your numbers fully. Here are the financial values that every founder needs to be acquainted with.

Revenue and Sales Growth

This is the total sales value of the products before subtracting the expenses incurred in producing them. It is one of investors’ most basic ratios for evaluating business entities’ performance. Increasing the number of sales or revenues should be another important factor you need to measure; this is the rate at which your revenue grows. Consequently, a steady increase in revenue resulted from the implementation of good market demand and business viability.

Gross Profit and Gross Margin

Gross margin is the revenue obtained within the business after deducing the cost of the product sold. This figure indicates how effectively you create value for the company by creating and delivering goods or services.

Gross margin is calculated as a percentage that indicates the gross profit divided by the revenue. A higher gross margin thus paints a picture of high pricing muscle and efficiency in operations. Gross margin is a very important factor attracting investors because high gross margins are likely more profitable.

Burn Rate and Runway

Burn rate refers to the rate at which an organization uses up its available capital every month. These are costs of operating the business, i.e., expenses frequently incurred, such as employees’ wages, building rent, and advertising costs. Knowing the burn rate helps one determine the time taken before the business runs out of cash and requires financial reinvestment.

The runway formula is the number of months a startup can sustain its operation with the money in the bank. It is determined by the ratio of the amount of cash available to the business multiplied by the amount the business consumes on day-to-day operations in a month. If your runway is short, you will need to look for capital or reduce costs to lengthen it.

Customer Acquisition Cost (CAC)

CAC is the cost incurred to attract customers or clients and convert them into company customers, including promotion and selling expenses. It is determined using the formula: total cost of acquiring customers divided by the acquired customers within a given period.

A low CAC compared to the revenue per customer is ideal since it portrays the image of a business expanding at a cheaper cost. If your CAC is high, it is unsustainable for your business, so your sales and marketing strategies must be improved.

Lifetime Value of a Customer (LTV)

LTV generally assesses the amount of money a customer spends throughout the relationship with your company. It is a key measure that helps predict the ability to generate stable high-profit rates in the long term.

LTV/CAC gives insight into a company’s efficiency in converting customer relationships into revenue. Successful startups should have LTVs at least three times higher than the CAC to attract investors.

Break-Even Point

The difference between break-even and loss is as follows: Break-even is when total sales equal total cost, so the company is not making a loss but also not making a profit. It enables you to set your business’s achievable sales and price-setting targets.

Some of the targets and goals include increased sales, breaking even, acquiring more customers, increasing revenue growth, and reducing reliance on external funding.

Net Profit and Net Profit Margin

Net profit is calculated by subtracting all business costs, operating expenses, taxes, and interest from the overall revenue. It is considered the ultimate measure of a startup’s profitability.

The net profit margin ratio is calculated as net profit and expressed in percentage using the formula: Net profit margin = Net profit/Sales revenue. A high and increasing net profit margin is considered a sign of the enterprise’s efficiency and solvency.

Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)

For subscription-based businesses, MRR represents forecastable revenue that a business generates every month, while ARR is the same but annual. These figures are useful in predicting future revenues and determining the stability of the business.

Investors regard MRR and ARR highly because they guarantee a constant income flow without drastic variations.

Churn Rate

The churn rate refers to the number of customers who cease to use a certain product or service within a specified time. High churn is a potential concern because it may indicate customer discontent or a competitive environment.

Reducing churn must be a top priority in any company or service organization, as it greatly impacts growth. To manage a high churn rate, working on quality and finding ways to increase customer satisfaction and loyalty is recommended.

Debt and Liabilities

Startups commonly use debt to finance growth, but debt should be used in an organized manner. Determining the total amount of liabilities or money you owe to others is important in the form of loans or balance dues.

A high debt-to-equity ratio implies financial risk, which makes investors wary. They perceive the firm as a high-risk investment. If your firm is operating on credit, it is advisable to have a strategy for managing the accrued dues without affecting operations.

Conclusion

An informed founder must have these kinds of figures and share them with potential investors for a more successful future. Measuring such metrics over time will assist in efficient business management and effective management of finance-related issues.