Common startup metrics mistakes to avoid.
For every business, whether a startup or a small corner shop business, cash is its life line. When a business runs out of cash, there is no going back at that point.
It is pretty easy to run out of cash and many startups fail to realise that until it is almost too late to turn it around and do something about it.
This article looks at early and later stage finance mistakes to avoid by startups.
Early stage common startup metrics mistakes
The early stage common finance mistakes by startups include:
Common startup metrics mistakes– not knowing what metrics to look for
This is about not knowing the numbers to look at to make sure your startup is healthy. In order to know about the health of your business, you need to know three basic things.
You can get these information from your bank statement or online banking.
The early stage metrics are so basic that anybody can do this. You don’t need to hire a bookkeeper or a financial consultant to get your numbers right.
However, as basic as they are, many startup founders do not look at them or don’t even know about them.
The four important metrics are: Burn, Runway, Growth Rate and your startup cash position.
This is the rate at which your company use up net cash over a certain period, usually a month.
This can be obtained from your bank statement as change in balance between two dates (money in minus money out). For months where you have spikes in your expenses, you can use averages to calculate your burn (average burn).
Runway is the cash-over-time requirement expressed in terms of number of months.
Like the length of runway that a plane needs to land safely, it shows the amount of cash the company has before it runs out of money.
To calculate your runway, simply divide your existing bank balance with the average burn.
The runway helps to give you a realistic status of your company. Don’t lower the burn in order to make the runway look good.
Doing that will make it look like you have more runway months than you actually do but you’ll still end up running out of money the same day anyway.
Growth rate (in percentage) for two periods is calculated by subtracting revenue in month 1 from revenue in month 2 divided by revenue in month 1.
The question here is, if your expenses are constant and your revenue growth continues, do you have enough cash to reach profitability?
This is a yes or no answer. Reaching profitability is important because it makes it easier to attract investors.
Common startup metrics mistakes- not knowing how often to look
Startups need to look at their metrics often – as often as every week or every month. A rule of thumb is that when someone asks for your numbers, you should know how and where to find your numbers and be able to give them.
Common startup metrics mistakes– thinking your expenses are lower than they actually are
Expenses don’t remain constant. Every startup needs to know those expenses that will increase over time and those that remain constant.
In the early stage, startup entrepreneurs tend to do things that don’t scale in order to acquire users. For example, in the early stage, entrepreneurs tend to do everything themselves and might be undervaluing their time by paying themselves very small amount – sometimes less than minimum wage.
By implication, your customer acquisition costs will look lower than they really. However, overtime, when you start hiring, the costs will increase your expenses more than you’ve had in the past.
This is because there are other associated costs in addition to salary (about 25-50% + salary) when you hire someone. For example, you’ll need to provide workspace, equipment etc.
Common startup metrics mistakes– thinking paid acquisition costs will remain the same
In the early days, it is easier to get the early users of a product. However, as time goes on, the cost of finding and converting users becomes higher.
It is best to assess the current costs to check if they are reasonable and to check the extent to which they might go up.
But it’s always best to assess the worst case scenario in terms of the amount of runway left. This would give you an idea of how best to figure things out within the runway months left.
Later stage common startup metrics mistakes
Investors are giving you their money, and they expect a miracle – they want multiplications of the amount they invested in your start up.
To do that, you need to be careful with your expenses and make sure your revenue grows.
Here are some later stage common startup metrics mistakes:
Common startup metrics mistakes– outsourcing responsibility
As the startup grows, there is a need to outsource some responsibilities.
For example, hiring a bookkeeper and/or an accountant. However, even when this aspect of the business has been outsourced, the CEO or the founding team still has a responsibility to ensure the numbers are accurate.
This is because the external bookkeeper is most likely dealing with just the numbers.
They do not understand the nitty-gritty of the company. Therefore, all they are able to do is to make a best guess on the numbers on your financial statement.
They do not fully understand the business as much as the startup owners.
Consequently, it is the responsibility of the startup founder/founders to ask questions about the numbers when they don’t understand the bookkeepers report.
Doing this will help to prevent misunderstanding the numbers.
Common startup metrics mistakes– hiring too quickly
Scaling the company and hiring too quickly because of pressure to hire people is not an ideal thing to do.
Remember every hire is an investment into your business and you should only hire if you’ll get a return on your investment.
Measuring the return on investment in terms of your hires is easy to measure in some types compared to others.
For example, a salesperson’s return on investments can be easily measured compared to that of a support staff.
If the salesperson is not bringing more sales than the company’s investment in them, then clearly there’s no return on investment.
However, for an administrative staff, it is more difficult to measure the return on investment.
Therefore, it is useful to measure the ratio of revenue to employees – the higher the ratio, the better you’re doing.
Startup owners have the responsibility of ensuring that everybody hired is adding value to the company.
Consequently, when people are not pulling their weight they need to be fired immediately.
One of keys to success for startups is the ability to do more with less. This is the path to success that reduces the worry and anxiety about whether the usiness will succeed or fail.
You should avoid scaling before your Product Market Fit (PMF) – more employees will not help you get there faster or more efficiently.
Raising funds with low leverage
Finally, the seventh common metric mistake made by startups is letting the runway get too low before fundraising.
If this happens, you’re going to get into problems trying to raise money.
It is better to always run your startup based on the assumption that you’ll never raise money again.
This will help you aim at getting profitability from the money you get. Remember the seed stage money is to help you reach PMF.
After series A and beyond, sustained growth is expected. Therefore, it is often harder to get funding at later stages.
This is a reason why you should not wait too late – your runway (typically not less than 12 months) gives you leverage.
But when you’re running out of runway, your leverage goes down when you’re trying to get funding.
Every entrepreneur needs to avoid these common startup metrics mistakes, so as not to run out of money.
As a startup entrepreneur, you should know your cash balance at all times. The runway metric is also critical and should never be inflated.
Understand and manage your expenses. Pay special attention to those expenses that increase over time.
Don’t wait till your runway is too low before you seek funding to avoid lowering your leverage.