Small business owners tend to focus on profit-generating activities, such as developing new products or attracting additional customers and clients to their rosters. However, by devoting all your attention to growing your company, you may actually be injuring the long-term financial health of your business. With only one-third of small businesses surviving to reach the 10-year mark, entrepreneurs should take pains to give their startups the best chance at longevity.
Below are five key financial metrics that every startup should track in 2015.
1. Cost Per Acquisition
One of the most crucial business metrics, cost per acquisition (CPA) refers to the amount of money required to attract a new customer to your business. While every company needs clients and customers to be successful, spending too much on CPA can cripple your startup.
Entrepreneurs can calculate CPA by dividing the total cost of sales and marketing over a given period by the number of clients acquired in that time. If the cost of acquiring a customer exceeds the profits he or she is generating for your business, your CPA is likely too high. By tracking the channels from which customers are acquired—including pay-per-click ads, email campaigns, search engine marketing, etc.—you can determine the best places to cut costs as well as those that should be infused with more cash.
2. Churn Rate
Do you feel as though you’re always losing customers to the competition? A business’ churn rate refers to the number of clients who drop its services in a given period. While every company experiences some amount of churn, startups should track this number carefully and take action if too many customers seem to be jumping ship. Not only is keeping existing customers less expensive than securing new ones, but studies show that 61% of clients who abandon you will take their business to a competitor.
To minimize their churn rates moving forward, entrepreneurs should strive to conduct interviews with dissatisfied customers. While many startups choose to send email surveys, in-person interviews are the best way to connect with customers and possibly win back their services. In fact, studies show that businesses are more likely to close deals with past clients than they are with brand-new ones.
Ask clients what you can do better, and encourage them to give you another chance to get it right.
3. Employee Salary
No business can succeed without strong employees to represent its interests. However, the truth is that many startups face financial issues due to inflated employee salaries. In your desire to hire the best and brightest, you may actually be compromising your startup’s financial security during a key phase in its development.
To keep costs down, do your research to determine what other startups are paying their workers in similar roles, and track employee salary numbers carefully to ensure you aren’t paying more than you can truly afford. You can also supplement a smaller salary with benefits like flexible hours, telecommuting or even stock options.
Additionally, startups should strive to make the first employees they hire ones who will help them increase sales numbers. Once you’ve enhanced revenue, you can bring in employees to grow your business in other ways.
4. Revenue Run Rate
Most entrepreneurs know that revenue refers to the income a business receives over a given period of time. However, you may be less familiar with revenue run rate, which refers to an extrapolation of annualized revenue based on current income levels. To determine revenue run rate for the year, simply multiply last month’s numbers by 12.
Startup founders should take care to track revenue run rates carefully, so they can evaluate how their businesses are scaling. By identifying trends and patterns in your sales, you can tailor your business strategy accordingly.
5. Cash Flow/Burn Rate
It’s no secret that a business requires sufficient cash flow to operate effectively. One of the most essential financial metrics for a startup, burn rate refers to the speed with which a business uses up its cash reserves to pay for overhead. Failing to track your burn rate can seriously hinder your startup operations, as you won’t have the cash needed to run your company.
To ensure an accurate record of expenses, aim to pay bills with a credit card instead of cash. You can also encourage cash sales from customers to get money into your account faster. Finally, startup businesses should strive to cut costs by keeping overhead to a minimum and negotiating more affordable deals with suppliers and vendors.
Empower Your Startup to Succeed
Startup founders have a great deal on their minds. From finding new customers, to managing employees and vendors, it can be easy for certain financial metrics to take a backseat. However, the truth is that startups need to examine financial metrics even more frequently than established businesses because of their limited resources. Stay on top of your financial data to give your startup the best shot at becoming an established company.