This weekend in the conference room we got a gigantic appreciation for the outcome of MIS reports. Everyone was amazed of this masterpiece that we had created and the brilliant analytics that we were able to derive at.
They were pleased beyond appreciation all because of the crazy analytics. Like analytics from everything – Balance Sheet, Income & Expense Sheet, Cashflow Statements, Ratios and what not!
All arriving and relating to the main part – current position of our company and in the simplest way with so many insights the investors were blown away.
Bragging a lot right, with no insights?
Well, Don’t worry! I’ll let you in on how to analyze these reports.
Let’s start with analyzing the financials:
For eg. Increase in debtors can help us understand longstanding dues which are yet to be cleared. If the creditors are decreasing we can interpret the increase in cash outflow from the business.
Income & Expense Statement
Differentiating the income received from various areas can help us acknowledge the area which thrives the most business for the company and the company can decide to cut out the area which does not help largely in generating revenue.
For eg: If revenue has decreased from the previous months, factors affecting the revenue can be identified and hence be eliminated or reduced. And if revenue has increased factors responsible for growth can be identified and hence be worked upon more efficiently than before.
Expenses which are variable to the business can be reduced as and according to the product it is related to and the products revenue generation. For eg. If product X is generating less revenue in comparison to the expenses towards it then the company can decide to scrap product X and can save largely.
Similarly if any expense is increasing it can be questioned as to the reason of increase. Every increase should have a withstanding reason to it. For eg: If there’s a sudden spike in repairs & maintenance it can be because of an capital expenditure for say an furniture was made it should be allocated in the fixed assets segment.
While analysis various accounting errors can also be identified.
Cash Flow Statements-
Cash flow statements are classified into three types: Operating activities, Investment activities and Financing activities.
Operating activities help assess a company’s cost and stock management efficiency. It highlights the level of cost that a company needs to make to generate revenue, which is the main goal of a company. Hence helping us understand the operational liquidity, which can help in future cash crunch.
Investing activities give you insights into how a business might grow in future and earn more revenue. Even if investing activities is negative it might not be a bad sign if management is investing in the long term health of the company. It all depends on future yield in investing activities.
Financing activities are crucial for both the investors as well as debt providers of the company. The reflection of these activities accounts for determining the fund efficiency of the enterprise. It shows the ability of the organization to raise funds and manage funds.
Ahhhh tiring right?
Spare me for the last one – Key financial ratios.
Without wasting any time let’s get right into it.
Whenever we are about to go big or do anything out of our comfort zone like something really big! There are few constraints that we look into. For instance while buying a house we look at the spendable amount we have, even if you take a loan for it, you need money to pay those loans too, right?
These are the personal finances that we should know for our better future.
Similarly whenever you are about to raise funds, measure KPI’s or plan for the future of your startup there are certain financial metrics that you should know.
Well losing money is a cakewalk all you need is wrong investments, huge EMIs and some dog image coins and Whoosh! Easily poor in the next 30 days.
But for making money you need years and years of efforts, dedication & smartness.
Well, making an MIS is one of the smart things that you’ll be doing for making more money.
Let me tell you about some of the key metrics you can track for better understanding of your financial and which can help you save money.
Runway (a.k.a cash runway) is how many months your startup has before it runs out of cash. The longer your runway, the more time you have to build and grow your startup.
Your revenue and expenses determine your runway. If your monthly expenses exceed your monthly revenue, you will eventually run out of money. Your runway indicates when “eventually” is.
Aside from the fact that your company requires runway to exist, this financial metric can reveal a lot about your company.
A shorter runway, for example, indicates that you’re either spending too much money or your revenue isn’t growing at a sustainable rate. In either case, you have a few options for increasing your runway length:
1. Reduce your spending
2. Increase your earnings
3. Obtain additional funding
Technically your cash runway = Current Cash Balance/ Burn Rate will give you the number of months you have before running out of cash.
2. Burn Rate
Burn rate is majorly related to runway. In fact, you can’t calculate your runway unless you know what your burn rate is.
Simply put, your burn rate is the amount of money you lose each month.
Technically Burn Rate if calculated monthly = Expense – Revenue
For instance a company generated Rs.397500 in revenue, but had Rs.534660 in expenses, which gives them a burn rate of Rs.137160
When your monthly revenue exceeds your expenses, you’ll have a net negative burn rate, which is ideal for startups.
Remember that burn isn’t always a bad thing. After all, it takes money to build a successful business. Salaries, software, marketing, and other costs all add to your burn rate. However, they are all required to build a startup.
The issue arises when you burn too much money or burn it too quickly.
If your burn rate is too high or it’s shortening your runway, you’ll have to dive into what your biggest expenses are and see where you can potentially cut costs.
Burn rate is a financial metric your startup can’t afford to ignore.
Monthly recurring revenue (MRR) is a financial metric that every SaaS startup or subscription-based business should be familiar with.
The amount of recurring revenue generated by subscription customers is referred to as MRR.
MRR has the advantage of making your revenue more predictable than one-time sales.
For instance, if you have 1,000 customers paying an average of Rs.500 per month, then you know your monthly revenue will be around Rs.5,00,000 for the next several months (hopefully more as you get more customers).
Knowing your MRR also gives you a way to be smarter about expenses
Calculating MRR is simple, just multiply the number of monthly subscribers by the average revenue per user (ARPU).
4. MRR Churn
We talked about incoming monthly revenue, but there’s a flip side to that.
MRR Churn, or revenue churn, is the amount of monthly recurring revenue you lose from existing MRR churn is caused by one of two events:
When a customer cancels their account, they forfeit all future MRR. When a customer downgrades their account, you will only lose a portion of their MRR.
The main reason you should monitor this financial metric for your startup is that you are losing revenue. Beyond that, you must track MRR churn on a monthly basis to detect negative trends early.
If your MRR churn rate is constantly increasing, it indicates that you are either unable to retain customers or that customers are unwilling to spend as much money with you.
Begin by asking customers why they’re cancelling or downgrading their accounts to gain insights that will help you reduce MRR churn. Then you can devise a strategy for retaining more customers and increasing revenue.
5. CAC (Customer Acquisition Cost)
CAC is the average amount of money spent to acquire one new customer.
We all might have a question that what exactly gets included in CAC?
Simply, it’s any marketing and sales cost associated with acquiring customers.
Your startup’s CAC performance can make or kill it. And although you might imagine that your objective should be to spend as little as possible to get clients, it’s not quite that simple. More like a balancing act, really.
If you spend too much on gaining new clients, you’ll eventually run out of cash. If you don’t invest enough money, your efforts won’t be as effective.
The key is to strike that balance between spending just enough to turn a profit and spending just enough to attract the best (and most) clients.
But LTV and CAC work together.
But first let’s see what LTV is:
6. LTV (Customer Lifetime Value) is a very important financial metric for startups with a recurring revenue model.
LTV reveals the typical amount of money you can make from a customer before they leave.
Startups should track LTV to determine how much they can afford to spend on client acquisition, which is probably the most crucial factor.
In fact, the LTV:CAC ratio is a whole financial statistic that is devoted to the relationship.
The LTV:CAC ratio evaluates the relationship between an average customer’s lifetime value and the typical cost of acquiring that client.
If your ratio is 1:3 for example, that means you’re spending 3X as much to acquire customers as they bring in over their lifetime. The closer you get to a 1:1 ratio, the more likely it is that you’re spending too much to acquire customers.
You should constantly test and tweak your strategy to find the optimal CAC. Also, compare CAC by channel (Google Ads, Facebook Ads, trade shows, etc.) to find out where to put your marketing and sales rupees to have the biggest impact.
There are also many other ratios that a startup can track like profitability ratio, gross profit ratio, liquidity ratio, turnover ratio and what not! But for now we can start with these ratios to track our financials.
Phewww! A very long and tiring one right?
But indeed an important one.
Well, without taking away anymore of your time, will see you next time!