Definitions & Formulas of The Most Important Financial Metrics For Startups

Burn rate

Definition:

Burn rate is one of the most crucial metrics that startups need to be aware of. Burn rate refers to the rate at which a startup is spending its available capital.

Formula: 

Operating cash inflows - operating cash outflows 

Why it’s important:

It’s important for you to closely monitor your burn rate and ensure that you’re not spending money too quickly, which could lead to running out of funds. By understanding your burn rate, you can make more informed decisions about your spending and adjust your business strategies accordingly. 

Runway

Definition:

Runway is the length of time (usually tracked in months) that a startup can continue operating with its current level of funding. 

Formula: 

Total cash balance ÷ last 30 day burn rate

Why it’s important:

By calculating and keeping track of your runway, you can determine how long you have until you need to secure additional funding or get to break even and profitability. This metric is crucial for you to be able to plan fundraising efforts and make strategic decisions about the growth and sustainability of your startup.

Cash flow 

Definition:

Cash flow refers to the movement of money into and out of a business. 

Formula: 

Cash inflows - cash outflows 

Why it’s important:

It is important for startups to eventually have a positive cash flow, meaning that they have more money coming in than going out of their company. Positive cash flow ensures that a startup has enough funds to cover its expenses and invest in growth. Founders should closely monitor their cash flow to identify any potential cash flow problems and take appropriate actions to address them.

Gross profit 

Definition:

Gross margin measures the product profitability of a startup by calculating the revenue that is left after deducting the cost of goods sold.

Formula: 

Revenue - cost of goods sold

Why it’s important:

Gross profit measures the profitability of a startup by calculating the revenue that is left after deducting the expenses involved with creating the product. Founders should aim to maintain a high gross profit to ensure the long-term sustainability and success of their startup. If your gross profit is negative, you should explore how to cut the cost of goods sold or increase revenue quickly. 

Customer acquisition cost

Definition:

Customer acquisition cost or CAC, measures the cost of acquiring a new customer, including marketing and sales expenses. 

Formula: 

(Cost of sales + marketing) ÷ # of new customers acquired

Why it’s important:

By calculating your CAC, you can evaluate the effectiveness of your customer acquisition strategies and determine whether you are spending an appropriate amount to acquire new customers. Keeping your CAC in check is crucial for startups to optimize their marketing and sales efforts and achieve a positive return on investment.

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