February 8, 2023
Weighing Direct vs. Indirect Cash Flow Forecasting Methods
You need to understand direct vs. indirect cash flow forecasting to make short and long-term business decisions. This article will show you how.
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Founder Toolkit
Startup KPIs: What And How To Track For Success
If you’re like most SaaS startup founders, you’re likely already tracking some basic metrics—but are you tracking the right metrics for your business? Many of the SaaS business founders we speak with are overlooking some of the key performance indicators (KPIs) they need to get a complete picture of their financial position, make smart data-driven decisions, and measure progress toward their business goals.
The full range of KPIs you need to monitor depends on your specific business model and needs, but there are five types of startup KPIs that all SaaS companies should be tracking:
- Top of funnel KPIs
- Revenue KPIs
- Unit economics KPIs
- Product/market fit KPIs
- Financial KPIs
Regularly tracking these important KPIs gives you visibility into areas of your business that may be holding you back from growth and need urgent attention. You’ll also get insights into the profitability of your startup to use in financial projections, or share with board members and potential investors.
Let’s take a look at the KPIs these four categories include and how to calculate them.
5 Types Of Startup KPIs SaaS Founders Need To Track
1. Top Of Funnel KPIs
Top of funnel KPIs show the number of potential customers moving through your sales pipeline. With these figures, you can identify the stages in your sales funnel where you’re losing the most prospects, and target these ‘leaky’ areas to convert more leads into customers. Top of funnel KPIs also indicate how many customers you’ll generate from the leads you’re working with, so you can predict how many sales you’ll make over the coming months.
Below are four essential top of funnel KPIs for startups:
- Number of leads—The number of people who have interacted with your business (for example by signing up to attend a top of funnel webinar) and have entered your sales funnel. These people may be interested in your service, or they may just be browsing.
- Number of marketing qualified leads (MQLs)—The number of leads who have shown interest in your service and have the potential to become customers, as determined by a set of criteria from your marketing team. For example, this might include leads who download your pricing guide or visit your site a specified number of times.
- Number of sales qualified leads (SQLs)—The number of leads who have shown strong purchase intent and are likely to become customers, as determined by a set of criteria from your sales team. For example, this might include leads who respond to a sales email or set up a demo.
- Funnel conversion rates—Using the number of leads, MQLs, SQLs, and the number of new customers these leads have resulted in, you can calculate the percentage of people who progress between each stage of the funnel: These are your conversion rates. For example, if you generated 100 new leads in a month and 30 of these leads become MQLs, the conversion rate between these stages is 30%.
2. Revenue KPIs
For businesses that rely on subscriptions, there are two vital revenue KPIs: monthly recurring revenue (MRR) and annual recurring revenue (ARR). These metrics give an accurate picture of your startup’s net revenue for the month or year by including both new and existing subscriptions, as well as any subscription revenue that was lost. Because MRR and ARR show recurring revenue, they are reliable indicators of the amount of revenue you’ll generate for the next three or six months, and the scale at which your business is growing.
There are several types of MRR to take into account when calculating your total MRR and ARR:
- New MRR—The revenue received from all new customers in a given month. This growth rate figure demonstrates your ability to successfully grow your customer base.
- Reactivation MRR—The revenue received from customers who have previously canceled their subscription but reactivate their subscription in a given month.
- Upgrade MRR—The additional recurring revenue received from existing customers in a given month. This is generated by cross-selling or upselling, and is also known as expansion MRR.
- Downgrade MRR—The revenue lost through existing customers downgrading to a lower-value subscription in a given month.
- Churn MRR—The revenue lost through customers ending their subscription and leaving the service in a given month.
- Existing MRR—The revenue from existing customers who have not reactivated, upgraded, or downgraded their subscription in a given month.
- Total MRR—Using the above six types of MRR, you can calculate the net monthly recurring revenue:
- ARR—Based on your total MRR, you can calculate the net annual recurring revenue. Despite its name, it’s best practice to track ARR on a monthly basis.
- Customer Churn Rate—The number of customers who end their subscription and leave the service in a given time period.
- Customer Retention Rate—The number of customers who stay with your business (i.e. they do not churn) over a given time period.
3. Unit Economics KPIs
“What are your unit economics?” It’s a question many investors ask, but most founders don’t have these figures at their fingertips. Unit economics KPIs look at the average revenue and costs per customer, and show whether you’re spending more money acquiring customers than they’re likely to generate for your business. In short, they determine whether your marketing and sales channels are operating in a healthy way. For potential investors, your unit economics indicate if the money they put in is likely to grow, or if your startup is a leaky bucket.
There are four key metrics for SaaS startup unit economics:
- Average revenue per customer (ARPC)—The average monthly revenue you receive per customer, also known as average revenue per user (ARPU) or average revenue per account (ARPA).
- Customer lifetime value (CLTV or LTV)—The average revenue you receive from a customer over their total relationship with your business.
- Customer acquisition cost (CAC)—The average cost of acquiring each customer, based on the sales and marketing investment it takes to generate leads and convert them to sales.
- LTV:CAC ratio—Using these metrics, you can calculate the ratio between the acquisition costs and predicted revenue. An LTV:CAC ratio of 3:1 or higher is considered to be a good return on your investment.
It can be difficult to calculate the LTV:CAC ratio for very early stage startups with low churn rate: Until you start to see churn, you won’t know how long customers are likely to stay. In this case, you may need to predict your LTV based on the customer data you have and the metrics of similar businesses in your vertical.
4. Product/Market Fit KPIs
Product/market fit shows whether your product is solving a customer need. It’s a key indicator of whether your business is ready to scale, or if your product still needs more development in order to attract and keep customers. If you’re delivering great results for your product/market fit KPIs, it’s a good time to invest and grow; if you’re underperforming in these metrics, it’s going to be difficult to grow your user base unless you make changes to your product.
Regularly tracking these metrics allows you to see how your product development work is impacting customer satisfaction, and to identify the point where you have sufficient product/market fit to focus on growing your sales.
Below are three more important product/market fit KPIs. I also recommend tracking the Customer Churn Rate and CLTV metrics discussed above to get insight into whether customers are satisfied with your product.
Average Sales Cycle Length—The average number of days between a lead first entering your sales funnel and closing the deal. A short sales cycle suggests that your product fits with what customers are looking for, so they’re able to make faster buying decisions.
Net Promoter Score (NPS)—An indicator of your customer experience based on how customers rate your service on a scale of 1 to 10. Scores of 9 or 10 indicate promoters of your company; scores of 7-8 indicate people that feel passively about your company; and scores of 1-6 indicate people that feel negatively about your company.
Product Engagement—The number of users who are using your product on a regular basis. The ratio between the number of people using the product daily and the number of people using the product monthly shows the proportion of customers that are frequent users, and indicates how much value customers are getting from your product.
5. Finance KPIs
There are dozens of financial KPIs for startups that you could be tracking, but these six KPIs should be top of your list. Together, they give you an insight into your cash flow, total costs, and profitability, helping you budget your expenses to be in line with your revenue and giving early indication of potentially critical cash flow problems. These financial metrics are vital for startups that are considering fundraising: You can use them to calculate the amount of investment your business needs as well as when you need it.
You’ll find the financial data you need to calculate these KPIs in your Cash Flow Statement and Profit & Loss Statement.
- Cost of sales (COS)—The amount it costs you to provide your service. For SaaS companies, this may include the cost of hosting, providing support, and any third party services you use.
- Operating expenses (OPEX)—The ongoing costs of running your business that are not directly related to providing your service, for example rent, payroll, and office supplies.
- Net burn rate—The total amount of money your business loses each month. Learn more: How to Calculate Startup Burn Rate: Cash Burn vs Gross Burn vs Net Burn.
- Runway—The number of months your company can operate at its current rate before running out of cash.
- Cash zero date—The date your company will run out of money based on your current rate of spending.
How To Track Your Finance KPIs Daily, No Calculations Required
As a SaaS startup founder myself, I’ve seen the benefits founders and CEOs get from tracking these SaaS KPIs daily. You can confidently predict where your revenue will be at the end of the month, and identify and address any concerning trends before they become serious issues. If you only review these metrics monthly, you won’t get visibility into what’s coming down the line, and this makes it much harder to scale your startup. However, I know that for a lot of founders, the idea of adding yet another task to your daily workload can be daunting.
The good news is that with Zeni’s finance dashboard, checking on your financial KPIs daily only takes a few seconds. Zeni is a modern finance firm that combines AI and ML technology with human expertise to provide bookkeeping, accounting, tax, and CFO services for startups. With our dashboard, you get instant access to key financial metrics that are automatically updated with real-time data, including:
- Net burn
- Runway
- Cash zero date
- Total operating expenses
- Total revenue
- Cost of sales
- Gross margin
- Cash position
The Zeni Dashboard makes it easy to see exactly how your company is performing at a glance. No need to waste time searching for the right data or checking your calculations for errors: With the dashboard, you have the numbers you need right at your fingertips. Plus, you get full access to a finance concierge who can answer questions and help you interpret the figures.