Starting a Small Business

The Ultimate Guide to Startup Metrics: The 5 KPIs that CPAs Want You to Know

by
Bob Mason
on
8/8/2017
The Ultimate Guide to Startup Metrics: The 5 KPIs that CPAs Want You to Know

So much of your success as an entrepreneur will come down to your ability to make the right decision at the right time. The only way to guarantee that you're actually doing that based on actionable information is if you know what you should measure in the context of your long-term strategy. With that in mind, there are five core KPIs (key performance indicators) that CPAs and other financial professionals absolutely want you to know and make use of moving forward.

Revenue Growth Rate

If you had to make a list of all the numbers that a startup founder should know by heart, revenue growth rate would undoubtedly be right at the top. It's one of the most common KPIs for a reason; it's a solid indicator of how quickly your business is growing, which will, in turn, generate the type of momentum needed for everything you do next.

How you're doing financially, your relationship with your market and basic product success information are all tied into what your revenue growth rate is telling you. The only thing worse than not growing fast enough for a startup is growing at a rate far faster than you can actually sustain. Keeping an eye on your revenue growth rate will help make sure that doesn't happen.

To calculate revenue growth rate, use the following equation:

Daily Active Users to Monthly Active Users (DAU to MAU Ratio)

Along the same lines is your DAU to MAU Ratio, or the relationship of your Daily Active Users to Monthly Active Users. From a financial perspective, this is also important to know because it can help identify trends and patterns that will clue you in on whether that big bump in users was a fluke or if it's actually something you can sustain.

In essence, this is the proportion of your monthly active users who still actively engage with your product during the period of a single day. From this you can extrapolate how many people are coming back for more after their first exposure to your product or service.

To calculate the DAU to MAU Ratio, use the following equation:

Activation Rate

Activation rate is a measurement of how many visitors are actually engaging with your website or app in the first place. This is also important to know because it can help clue you in on problems with market fit, problems with your pricing structure and more -- all of which affects your ultimate income and long-term profitability.

Activation can be anything that matters to your business, be it how many people have downloaded your app, clicked on your link, spent time on your website, downloaded a file, signed up for your email list or more. This is essentially a measurement of how many people are actually taking the step you need them to take in order to start a relationship with your brand.

To calculate your activation rate, use the following equation. For the sake of this example, we'll use the example of email list signups:

Burn Rate

All of these KPIs will ultimately provide a necessary context to another one of the most important things you should be tracking: your burn rate. Burn rate is simply defined as the negative cash flow of your company. It shows how quickly your startup is spending money, which itself is necessary to determine how much cash you're going to need to keep operating and growing the way you want it to.

Your burn rate will be an essential lighthouse to work toward in order to know when you need to start fundraising to get to the next level of growth. It will also help clue potential investors in on the risk your company is facing, all of which is hugely important.

Remember that burn rate isn't necessarily a constant -- adjustments in one area of your business always affect another, after all. As a result, burn rate is something that you need to be actively watching on a regular basis for the best results.

To calculate the gross burn rate of your startup, use the following equation:

You can also calculate the net burn rate of your company by subtracting total revenue from total spend in a month to arrive at your net loss for that month. Perform that equation for two consecutive months, then subtract your Month B net loss from your Month A net loss to find out your net burn rate.

Customer Churn Rate

Finally, we arrive at customer churn rate, or the percentage of customers that your brand is losing after a particular period of time. Churn is absolutely normal, but a rate that is too high or too low could have major implications when it comes to scaling.

Taking advantage of up-selling and cross-selling opportunities, along with the strength of the initial relationship that you're forging with customers all go into determining what your customer churn rate will be.

To calculate customer churn rate, use the following equation:

Part of success in the life of a startup involves knowing what to track and how often. The work that you're doing each day doesn't exist in a vacuum -- decisions that you're making in one area of your business will absolutely affect the others, usually in terms of financial topics like cash flow and accounting. You can't spend money just because you think you're supposed to. You should be spending money because you need to in order to accomplish a very particular goal that will carry you farther down the line toward success.

Bob Mason, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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