As the cliché goes, numbers don’t lie. They provide you with insights about the efficiency and productivity of your business operations and the effectiveness of your sales and marketing strategies. They also allow you to determine the trajectory of your company, whether it will be profitable in the future or not. You need to know key financial metrics so that you are aware of your company’s standing in your niche. These financial metrics allow you to change your objectives and actions so that your growing company is on the right path.
These are the key financial metrics your team should look out for when assessing your company.
Regardless of the business model you use, one financial metric you should monitor is your company’s revenue. This metric measures the amount of money you receive from the sale of products and/or services. Some stop at reviewing the overall revenue; however, this paints an incomplete picture. Ideally, you should also monitor the revenue you’re able to generate by type such as source, recurring, and non-recurring. Categorization allows you to determine which products and services are the most profitable. This enables you to direct and use your resources in the most effective ways. You’ll not only increase revenue but also substantially reduce your costs.
Monthly Recurring Revenue
Monthly recurring revenue or MRR is a metric that subscription-based companies should track. This is the revenue generated from customers that have subscribed to your service. This model simplifies monitoring of potential monthly revenue because you’ll know exactly how many customers you have. This enables you to manage expenses and resources effectively. You can also create forecasts for the coming months and plan ahead. You’ll determine if you can hire new employees, launch a marketing campaign, and/or invest in software or equipment.
Average Revenue per Account
This metric shows the average revenue you generate from each account. This enables you to make plans and projections that can determine the trajectory of your company. For example, you want to increase your revenue but most of your customers are at the lowest price tier of the services you offer, let’s say it’s US$20. If you want to significantly boost profit, you’ll have to convince those users to move to a higher price tier (ex. US$80) or find new customers that see its value. Increase your efforts in providing customers with value so that they’ll consider upgrading their package.
One of the key financial metrics you should monitor is this one. It tells you the recurring revenue your company loses from current customers. This might occur because a customer downgraded their package or canceled it. Regardless of the context, you’re still losing money. Monitor revenue churn to determine possible solutions to customers’ problems. Ask them why they downgraded or canceled. Find ways to provide better value to retain a customer or move them to a higher tier package. Focus on providing value for the services and products you offer. Consider adding more features or services to a package to attract customers or retain current ones.
Customer Lifetime Value
This financial metric shows you the revenue you can generate from a customer before they downgrade, stop buying your products, or stop paying for your services. Customer lifetime value or LTV accounts for the length of customer subscriptions and the monthly revenue you generate. The higher your LTV is the more you can afford to spend to gain new customers. You’ll have to implement policies and strategies that will keep customers paying and satisfied for the foreseeable future to keep your LTV high.
This financial metric measures how much cash you have until you run out. A longer runway means that you have more than enough cash to grow your business and maintain profitability. If your expenses are higher than your revenue, your runway will be short and you will run out of cash faster than usual. A shorter runway means that you’re handling your resources ineffectively. You’re spending too much and not generating enough revenue. Use a runway to make projections and models about where your business is heading. Use different scenarios wherein your revenue increases and expenses decrease or vice-versa. If your runway lengthens or shortens in the various scenarios and models you created, you can determine which strategy to implement.
This metric shows you how much money you lose every month. For example, you generated revenue of US$20000, but your costs total US$30000. Your business has a burn rate of US$10000. The ideal situation is when you reach a negative burn rate, which means your revenue is higher than your costs. If your burn rate is consistently high for an extended period, you might have to review your costs. This allows you to determine which aspects of your business to cut costs. It can be advertising, marketing, purchasing or maintenance of equipment, and others. The sooner you identify the main causes of heavy spending, the sooner you can adjust. However, you have to put your burn rate into context. Building up a business from scratch requires a lot of investment in hiring employees, buying or renting office space, purchasing of equipment and goods, and other expenses. Your burn rate might be higher than usual during this phase of your company’s growth.
You get this metric after deducting the cost of goods sold from the total revenue. It provides you with insights into how much revenue you’re actually making. If you spend more to make and sell an item than the revenue it generates, your business will have little room for growth. Identify ways wherein you reduce the cost of goods sold while maximizing revenue.
These key financial metrics allow you to assess your business objectively. It also allows you to gain insights on how to efficiently use resources and maximize revenue. Reduce expenses with the information you learned about the cost of goods sold, operations, and your company’s budget.
We at Robookkeeper can assist you whenever you need to update your accounting books. We offer first-rate virtual bookkeeping services for entrepreneurs. We can update your books while you focus your efforts on analyzing your company’s finances.