The difference between the success and failure of a startup is a clear understanding of business finance. With that in mind, the Odoni Partners team compiled this list of key financial ratios for startups.
Read on to learn more about startup accounting.
This ratio centers on the amount of money the business loses every month. Startups should aim for a negative burn rate – i.e., where their income exceeds their expenses. As this is not always possible with a new business, calculating the burn rate is essential to know how long your capital will last.
You may then make financial decisions to free cash flow and reduce expenses.
Understanding the profit margins entails some simple calculations:
Understanding the difference between these critical financial ratios is vital.
The gross profit margin tells you how much money the company has to service its debt and other expenses. It doesn’t, however, include factors like transport and staffing costs.
The operating margin includes the operational costs but excludes taxes and dividends. It’s a good indicator of how efficient the company is.
The net profit margin incorporates all costs and is, therefore, the most accurate reflection of profitability.
While it’s not ideal for small businesses to offer their clients credit terms, it can help them compete against established firms. Companies must, however, keep track of the accounts receivable turnover rate. To calculate this, use this formula:
Accounts Receivable Turnover ÷ 365
The answer illustrates how long it takes your average client to settle their account.
The MRR allows you to keep track of how many repeat clients are on the books. Understanding this figure makes it easier to predict your cash flow and marshal your resources.
It’s also essential to understand how much each client spends with your company. For example, do they select high-value items, or do they tend towards lower-priced tiers? Finding out makes it possible to tweak your offering to gain a greater share of your client’s wallet.
It’s also an indication of the efficiency of your sales team and helps you identify which clients are the best return on investment.
A high client acquisition rate may look good, but it means little unless you compare it to the churn rate. Churn is one of the key financial ratios for startups because it shows how many clients you lose a month.
A high rate here indicates a problem with the product or service delivery. The earlier the company learns the reason for churn, the sooner they can reverse the trend.
Do you need help understanding the key financial ratios for startups? Would you like advice on improving the health of your balance sheet? Then, get a head start with startup accounting services by Odoni Partners.
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