No one can hit their target with their eyes closed so focus on the metrics within your business that matter. Focus on the things that matter!
In this week’s blog we explain three things you should know at the top of your head and that your investors will be very interested to know too – your burn rate, runway and growth rate.
Burn Rate – How much cash are you burning each month?
It’s cash, not revenue! If a customer purchases your product but only pays next year, that’s going to impact your burn rate and directly impact your cash position
- How to calculate it?
Cash going out each month minus cash coming in each month. It is a cashflow question, not revenue!
- Why it’s an important metric: it shows the rate at which investor funds are being depleted, clearly demonstrating performance.
Runway – how long before you run out of cash?
Your runway is a measure of the number of months you have left until your business runs out of cash.
- How to calculate it?
Easily calculated by how much cash is in your bank account and divided by your burn rate.
- Why it’s an important metric: it shows how close or far away from financial distress a company is, allowing for improved decisions related to spend.
This number helps you prioritise what to spend your money on, and when to consider reaching milestones to raise capital. If your cash is growing or expenses fluctuating, you need to estimate cash in and cash out in a monthly forecast to help derive this number more accurately.
Growth Rate – How fast are your sales growing?
Growth rates typically represent the compounded annualized rate of growth of a company’s revenues, earnings, dividends, or retail sales.
- How to calculate it?
Take this month’s revenue divided by last month’s revenue. Subtract one and show it as a percentage.
For example if this months revenue is $150, and last month’s revenue is $100, then the growth rate in revenue is 50%
This should be expressed as a compound number, meaning that as revenue grows, the denominator grows also. The compounded monthly growth rate doesn’t always work, especially if your business is cyclical. If that’s the case, use a more appropriate timeframe (such as quarterly) but make sure you explicitly explain the use of that growth rate.
- Why it’s an important metric: It demonstrates product market fit. If your revenue isn’t growing, either what you’re offering isn’t solving a need, your pricing is ineffective or your sales strategy is flawed.
