Sometimes, the terms benchmarking and Key Performance Indicators (KPIs) get mixed together. But they aren’t the same. Although these two things are complementary.
Benchmarking is when you assess how your business performance compared to previous results, competitors and companies in unrelated industries demonstrating world-class performance. In contrast, KPIs measure a business’s performance against its strategic goals.
In the context of privately backed companies, these are often focused on growth related to revenues and customers. However, the uncertain economic environment of 2023 is requiring a move away from growth at all costs KPIs, such as recurring revenues, and are now centred on sustainability measures.
These should indicate a pathway to profitability and should give investors comfort that your company can stand on its own two feet rather than be continually reliant on raising new rounds of financing.
During the growth at all-costs era, investors were firmly concentrated on recurring revenues. This is based on continuing monthly revenue streams from existing customers on multi-year contracts or from subscription services.
However, this is a relatively crude measure due to its simplicity. So it is not that useful.
Instead, you should measure CMRR. This is a more sophisticated take on recurring revenues that includes the strength of customer relationships. Rather than just assuming that they will continue to engage by buying the same value of products or services each month.
CMRR should consider the likelihood of cross-sell opportunities from existing customers and the risk of lost revenues from long-standing relationships.
The payback period measures how long it takes to break even on new customers won from customer acquisition activity.
You should seek for this to be as short as possible to prove that marketing spend has been worthwhile and create a business case for further activity.
If your payback period is lengthy, you risk of spending money on acquiring new customers that never contribute to bottom-line profits.
Calculate payback period by taking your sales and marketing spend in the period and dividing it by the number of customers acquired in the same period.
Once you’ve acquired customers, you’ll want to retain them for as long as possible. Whereas payback period indicates how long it takes to break even on a customer, CLV will demonstrate whether customers become profitable.
If your CLV increases, this will likely mean that customers are satisfied and can create a business case for spending on account management to retain customers and cross-sell new services. Aim for your CLV to be three times greater than your payback period.
Calculate CLV by taking your average revenue customer and dividing it by the average amount of months customers stay with you.
Your customer churn shows the number or proportion of customers lost in a set period.
A high proportion is a warning bell. It means you are at risk of losing further customers. In other words, you’ll need to reconsider future marketing spend and instead focus on increasing satisfaction levels.
If customers aren’t happy, try to understand why and what’s required to retain them. You may need to offer short-term discounts so they don’t take their custom elsewhere.
Calculate churn by taking the number of lost customers over a period and dividing it by the total number of customers at the beginning of the period.
As it’s becoming more challenging to raise equity finance at favourable valuations, conserve cash longer so you are in a stronger negotiating position when you next seek funding.
Cash burn is defined as the value of monthly losses and is calculated by subtracting your total costs from revenues.
Minimizing your cash burn extends your runway to the next funding round. And puts you under less pressure to accept offers with a lower valuation than your last raise.
Ideally, you should have enough cash in place to not need finance for the next 18 months to two years. In this timeframe, it’s also possible you may become profitable and not need external funding again.
Assigning finance team members to measure and interpret KPIs will empower them to do more value-adding work, with insights aiding the future strategic direction of the business.
To maximise the resources available to them, you should automate core finance workflows, including bookkeeping, expense management and monthly recurring journals.