What’s your idea of success? If you are financially inclined like us, your answer likely focuses on a few key numbers. Financial ratios for startups can help you gauge how your company is truly doing, in terms of current performance and in terms of your ultimate goals. Are you paying attention to the right financial ratios for startup companies? Here’s a guide to help you determine which metrics your emerging growth company should pay close attention to on a regular basis.
Determining Healthy Financial Ratios
When first getting to know a startup, our financial advisory consultants may start with the very question of “What are your KPIs?” Your key performance indicators—if you have determined them—can help us get a sense of what’s most important to the leadership team and how you determine whether the company is tracking in the right direction. In some cases, your KPIs or other metrics being viewed could be fine-tuned or narrowed, and in all cases, these figures should be shared widely with the company for those who will be held accountable to results.
As a financial analysis for startups is undertaken, it may become clear that the key ratios that have been so prominent in your day-to-day should shift. It may turn out that there are other metrics that could better help you align expectations and goals among the various people or organizations in your startup.
How to Determine the Right Financial Ratios for Startups
To determine the right ratios for your company, consider what others in your industry are doing, what your ultimate goals are at this moment, and how some of the metrics you currently review tie into that (or do not). Finance advisory consultants can help you by sharing their experience at companies similar to yours while also weighing in to help you narrow down your KPIs.
One of our top recommendations would be to choose SMART objectives: These objectives should be specific, measurable, achievable, relevant, and have a time component tied to them (everyone needs a deadline!). Because of the specificity of these objectives, they will be able to be followed both by the people working toward the objectives and those who are ultimately accountable for ensuring the objectives are achieved. Relevancy and achievability ensure that the goals can actually happen in a reasonable time frame.
Ultimately, such measurements help to put everyone on the team in alignment—formulating these objectives gets everyone thinking about the top goals of the company and their role in helping to achieve those goals. These goals may change as the company evolves and its priorities evolve.
One of the Hottest Financial Ratios for Startup Companies
Particularly in the technology industry, recurring revenue has become an important metric. This figure indicates a company’s stability, by providing insight into the company’s revenue stream and how it has thus far set itself up for success through its existing client base. While there are no guarantees that recurring revenue predictions will hold true, the recurring revenue model, which often includes monthly or annual subscriptions, has become popular with both companies and investors.
Other Important Financial Ratios for Startups
What matters most to your startup in terms of financial ratios will depend, of course, on its unique makeup, industry, culture, future prospects, market, and the interests of the leadership team. Here are few of the most important key financial ratios that startups pay particular attention to:
- Gross margins: Expert cost accountants can help you properly calculate and understand this figure, which indicates the profitability of your products.
- Operating income: How does your income from operations (revenue minus cost of goods and sold and operating expenses) today compare to the past, your budget, and your forecast?
- Profit margin: Is your company making money? Looking at revenue figures alone can muddy this answer.
What the Ratios Mean for Your Business
Is your company focused on the right metrics? How can you better align the expectations of your various stakeholders with the company’s strategic goals? A fresh, expert perspective can help your company prioritize financial ratios and determine how key objectives can be met and presented. Reach out to RoseRyan today to find out how we can help your startup work toward and track the progress of your latest goals.