CFO: Key finance metrics to monitor at a start-up

November 16, 2021 | David Daly 5 Mins read

Tracking and monitoring key financial metrics is core to the role of a CFO at any organization. when a CFO is involved in a startup company, these metrics or even more important as early-stage data in a startup or growing company can reveal a lot about the financial health, business model and organizational structure.

The CFO of a startup company will be very keen to have a strong handle on all of the relevant financial metrics, as it will be their responsibility to ensure the company is on firm financial footing, particularly in the early stages of development as the company is trying to establish itself in the market.

Where money is being spent and how it is being spent is hugely important at any company, but especially at a startup organization which may be still waiting for significant revenue streams to start flowing in. It takes time to build a reputation in the market and acquire new customers and revenue streams, therefore a CFO may not have the budget available in the early years to achieve all they want to get done-it is really about maximizing the opportunities within the budget available and managing the finances in such a way that costs always remain under control.

In this article, we will look at some of the key financial metrics that any chief financial officer will be monitoring very closely when they are running the financial operations department at a startup. It is a different environment than an established corporate entity, and CFOs need to carefully prioritize the key performance indicators they want to scrutinize as the company grows.

MRR

A monthly recurring revenue (MRR) is the amount of recurring revenue generated from a customer base who are paying a fixed fee every month-these can be viewed as subscription customers.

This metric is essential for startups with a subscription-based business model-such a model is very common with SaaS start-ups, and this will unsurprisingly, be a key financial metric worthy of major scrutiny in the office of the CFO. This is where you can learn about a key source of income to the business and identify what the likely monthly income cash flows from any existing client base will be.

This valuation figure helps the CFO to understand what the financial health of an organization is looking like now and what levels of income can be expected to flow into the business in the next 12 months. The MRR helps to make revenue predictable as subscription fees tend to be fixed for at least a year contractually, which makes it easier when forecasting anticipated business revenue.

Customer churn

While customer churn may never be a welcome metric, it is a reality of business life and CFOs at startups need to monitor the churn rate. The churn rate measures the number of customers leaving a business. Customers can leave for a variety of different reasons, and it is usually not the job of the CFO to figure out why it is happening, but it will always be their job to measure the impact financially as significant levels of churn will impact cash flow available for spending.

Monitoring the customer churn rate helps the CFO to track negative trends, get accurate data on the amount of financial revenue being lost and then work an average customer churn rate into their predictive modelling and forecasting figures. This is a figure that will always need to be factored into predictive models because any company, no matter how successful, experiences some level of customer churn.

Customer LTV

The customer lifetime value (LTV) indicates the average amount of revenue you can expect to generate from a new customer before they depart/churn. It can be very useful in predictive modelling and is derived from a combination of currently monthly revenue plus the length of their contract.

This is a key CFO metric because they will likely be asked to supply data to other teams in the business who want to come with an acceptable cost per acquisition figure and find out how much money they should ideally be spending to acquire customers.  This is very important, and a start-up does not want to over-spend on acquiring customers and discover their long-term value is lower than the effort and cost in getting them.

Gross Margin

An obvious one but some startups focus so much on making money come in the door, they lose sight of the money going out so the gross margin can give them context on where they stand. The CFO will use this metric to tell the full story behind the figures- if the revenue streams are good, the gross margin is needed to show just how good when you account for money exiting the business. It’s the revenue figure minus the cost of doing business and is a key pointer towards profitability.

It also points to growth efficiency, how well the business is doing overall. Most CFOs will find that the length of time the startup has been in operation plus their pricing model are key factors in the gross margin. Cost management responsibilities lie with the CFO, so this person will be keen to reduce costs where practical so that the revenue figures are consistently higher than the costs to drive a healthy and steady gross margin.

The start-up challenge

A CFO in a startup environment may not have access to all of the tools that they may previously have had in a more established corporate company. A startup is a different type of company and the person taking on the role of CFO is unlikely, in the early-stage to be surrounded by a full team of financial operations executives.

All startups enter the market from humble beginnings but with huge ambitions to grow significantly and without constraints. They will have a vision and a mandate to grow revenue streams so that they can become profitable and growth efficient as quickly as possible.

They will need a CFO to hit the ground running when it comes to financial analysis, cost control, financial planning, operating cash flow and financial forecasting. They will also want this person to play a significant role in the growth efficiency objectives of the company-expanding the global workforce quickly and efficiently as they move into new markets and territories. They will also look to the CFO to help them expand in a compliant manner- entering new markets and locating new employees in new countries is a significant compliance burden and the CFO will likely be called on to guide them on this journey.

All of this creates an immediate requirement for reporting and analytics tools as CFOs and business leaders require instant access to accurate and informative data & reporting to help with decision-making, company strategy and direction. Decisions made by a CFO are often only as good as the data available to them, so global consolidated financial reporting figures will always be required. A suite of smart technology reporting tools, easily accessible in a cloud environment can help put the CFO on the front foot when analyzing key metrics, figures and data in real-time.

 

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