The monitoring of the main financial metrics is configured as a process of fundamental importance for the growth and sustainability of the economic-financial cycle of startups. Often the KPI monitoring, and management control activities are considered complex and applicable only to large companies, but in reality its basic concepts can be adopted by any company, even a startup.
The analysis of the KPIs (Key Performance Indicators) of a startup embraces two primary dimensions, one internal and one external. In the first case, internal monitoring is essential for a correct quantification of company performance, for an assessment of deviations from the set objectives and for a cautious management of costs and investments. In the second case, the output deriving from monitoring activities represents a solid basis for evaluating the soundness of investment by investors and other stakeholders.
The first step in properly monitoring performance lies in identifying the most appropriate metrics in relation to the stage of life and the business model of the startup. In this sense, we can distinguish between validation metrics and performance metrics.
Validation metrics express the progress of a product just launched or in the launch phase. The entrepreneur can use these metrics to evaluate the success of the product on the market and to understand its strengths and weaknesses. Some examples of validation metrics can be:
• number of users who signed up to test a product / service;
• number of units sold of the product / service offered;
• number of recurring customers who return to purchase a product again
The performance metrics are configured as an indicator of the growth of the startup and are aimed at entrepreneurial projects with a greater degree of maturity and which need objective metrics to evaluate company performance. Some examples of performance metrics can be:
• Revenue Growth, ie the growth of revenues over time;
• Monthly Recurring Revenues (MRR), ie a metric that expresses the standardized predictable revenue the startup can generate each month;
• Average Revenues Per User (ARPU), ie the average revenue generated per customer;
• Customer Acquisition Cost (CAC), ie the cost incurred to acquire a customer;
• Life Time Value (LTV), which is an estimate of the revenue that a customer will be able to generate over time;
• Churn Rate, which is a metric that expresses the churn rate of its customers.
Validation and performance metrics mainly measure the economic and business aspects of the startup. As regards the financial cycle, i.e. the cycle that relates to the startup’s financial income and expenses, it is possible to identify and adopt financial metrics.
Financial metrics take on strategic importance for proper management and proper monitoring of the startup’s financial resources. Some of the more common examples are:
• Burn Rate, ie an indicator that expresses the rate of combustion of the startup’s financial resources in a specific period of time, calculated as the difference between total outgoings and total cash inflows in the reference period;
• Cash Runway, which is the amount of time a startup can survive without income before cash runs out.
Metrics are fundamental in all stages of a startup’s life, they represent the compass to make important decisions and the concrete proof to demonstrate the validity of the project to third parties. Of course, not all metrics are suitable for every type of business model. Therefore, before quantifying and analyzing the performance of the startup, the first step of identifying the most suitable metrics for your business model takes on strategic importance for the growth of the company.
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The BizPlace Team