As a business begins to grow at a higher and higher growth rate, ie. changing growth rates quarterly or monthly, management must pay close attention to the financial statements and key metrics used to measure business performance and manage cash. These metrics are called key performance indicators (KPIs).
These statements, metrics and trends help determine historical performance and health, but also define the future state of the business via a forecast. There are both financial and operational KPIs. You can develop KPIs specific to your business but we will show common ones in this blog.
During a period of growth, relationships between the activities that drive growth and the ensuing costs can change. Management needs to understand the changes that are taking place in order to effectively manage future costs and cash positions. Growing companies need to find a balance between growth rates and cash burn.
Let’s start with the financial statements: Income Statement (IS), Balance Sheet (BS) and Cash Flow Statement (CF). The IS shows key outcomes of revenue, gross profit and net profit. The performance of those three outcomes depends on how much cost is being spent in the four key expense departments: Cost of Goods Sold (COGS), Sales & Marketing (SM), Research & Development (RD) and General & Administrative (GA). All of these measurements should be measured against the prior period and against the forecasted amount.
Here are examples of financial metrics that can be used. Note that these metrics are more oriented to service and technology businesses.
Financial metrics from IS
- Revenue growth:
- Growth over prior period %
- % achieved against forecast period
- Total contracted annual revenue growth %
- Gross margin: shows how efficiently the company can support revenue
- Calculated as: Gross Profit (Revenue minus COGS )÷ Revenue %
- Operating expenses: total for the period versus forecast
- Net margin: Determines if the target was hit. Better or Worse?
- Calculated as: Net Profit ÷ Revenue %
- EBITDA margin: Earnings before interest, taxes, depreciation and amortization or net margin plus interest, taxes, depreciation and amortization
- Calculated as: EBITDA ÷ Revenue %
Financial metrics from CS
- Cash burn: cash generation by period
- Cash balance: how much cash is in the bank
- Cash runway: Indicates how many months the company can operate before running out of cash
- Calculated as: cash balance ÷ monthly burn rate
Financial metrics from BS
- Current Ratio = Current Assets ÷ Current Liabilities
- Quick Ratio = (Cash + Accounts Receivable + Short term investments) ÷ Current Liabilities
- Working Capital = Current Assets – Current Liabilities
- Debt to Equity Ratio
Now let’s turn to Operational metrics. Operating metrics can involve financial figures, but also include non-financial data such as customers, employees, accounts, leads, etc. Operational metrics are key to knowing how the business itself is functioning.
Sales & Marketing metrics (SM)
- # of new customers, on target or improvement or declined
- # new qualified leads in the sales funnel at defined levels
- Total live customers
- # Churned customers
- Churned revenue
- Average # deals closed per # sales folks on staff
- Average revenue generated per sales personnel
- Average size of closed deals
Implementation metrics (COGS)
- # of accounts in implementations, on target or improvement or declined
- # of accounts going live
- Average days to go live
- # of implementations per number of implementors on the team
Scale/Growth metrics (GA)
- Total # of employees
- # of employees by department
- Average # of accounts per account management personnel
- Average number of support tickets per customer support personnel
- Average number of invoices or customers per accounting headcount
- Average number of headcount per Human Resource person; only used after human resource person hired
All or a subset of these metrics should be put into a dashboard that is updated on a monthly basis. Not only do you look at the current month against prior or budget, but you want to look for signals and trends indicating something has changed positively, negatively or you are on track to meet or beat budget. Where there are negative variances, understand why and try to address problem areas. Variance is simply the difference between an actual result and a forecasted result. Below is an example format for metrics.
These metrics should be updated on a monthly basis. The example only shows information for the current month and year-to-date. That is a dashboard for a specific period of time. The same data should be examined over time as well. Looking at the information over time will show trends.
Hopefully, the data shows improving trends and not vice versa. When trends don’t look good corrective action is required. But don’t forget that even with good trends, business performance can be improved.