The Most Important Financial Items Entrepreneurs Should Track
Whether you’re managing your own startup finances, or have an outside firm taking care of this for you, there are many financial items that entrepreneurs should closely track. Here are some of the key ones I recommend all early-stage startups keep a close eye on:
Cash flow/burn rate. Your burn rate is perhaps the most important financial item you need to track: how quickly are you going through your cash reserves, and how quickly are you building those reserves back up. In other words: revenue in minus expenses out. If you don’t keep track of your burn rate, you could run out of cash before you even get your startup off the ground.
Runway. Your runway can be calculated with a simple equation: your cash divided by your net loss. In other words, it is the number that tells you how much time you have before you will run out of money. Tracking your runway is key to business planning -- you simply can’t make investments that will deplete your cash reserves if you want to keep your business afloat.
Milestone financing. Staying on top of your cash burn and runway, gives you the insight you need for milestone funding. It’s useless to set business goals without integrating your finances. When you identify your key milestones, you need to align your finances (and fundraising efforts) accordingly. How much will you need to hit your next milestone? Take it one step at a time and don’t rush to scale.
AR (Accounts Receivable). You need to track your receivables and how long it takes before your invoices are paid. This is just another way of saying you need to keep an eye on your revenue - how much is coming in and when it’s coming in. It’s great to earn revenue, but you also need to track this to ensure your ability to collect debts.
AP (Accounts Payable). You need to have a clear record of all of your payables. This needs to be balanced out with your existing cash and cash-in flow. What is due and when - if you don’t have a clear sense of this, it’s all too easy to overspend and get yourself into trouble.
Gross profit margin ratio. Your gross profit is your revenue minus the cost of the goods you’ve sold (aka Cost of Goods Sold - COGS). It’s not enough to look at revenue earned, of course. You need to have a clear understanding of your profit margin once your costs have been subtracted from that revenue earned.
Working capital ratio. This calculation is based on your current assets (assets that can be turned to cash within the year) divided by your current liabilities (debts which will come due with the year). What this ratio tells you is whether your assets are large enough to cover your projected debts. What you want to see here is a number above one (the higher the better) which indicates that you have sufficient working capital.
ROI. Whether it’s a new product or marketing campaign, no initiative should be undertaken without keeping track of the return on your investment. Regardless of the initiative, if you aren’t earning back a big enough percentage on your investment, you need to scale back or pivot.
Customer acquisition cost (CAC). How much are you investing in acquiring each new customer? What is your conversion rate? Without customers, your business isn’t really a business. You need to know how much you’re investing in each new customer acquisition to optimize conversions and grow your business at a healthy rate.
Depending on what kind of business you have and at what stage of development your startup is, there may be other valuable KPIs (key performance indicators) to track such as direct margin percentage, net profit margin ratio, average dollar, spending, sales funnel figures or others. But the financial metrics I’ve listed here are a solid foundation. Start with these to get a good understanding of -- and to secure -- your startup financial health.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.