Running a company, especially a startup is like driving a rally car on a treacherous route. You cannot loose control, even for a moment. Your eyes must stay focused on critical parameters (a)the road ahead (b)the speed of travel, and (c) the rate of fuel burn.
In the same manner, when driving a startup also, the entrepreneur must have his eye on key numbers. These are known as control metrics. There are many, but like every thing in life, there are a vital few control parameters or metrics that need to be monitored.
1) Operating cash flow: This is perhaps the most important metric for a startup.
This metric tells you if your business is generating cash or burning cash.
This is defined by the simple formula:
Operating cash flow= Revenue- Costs + Change in Working Capital
This is easily calculated from the data available in the balance sheet & Income statements of the company. All startups must ensure that their accountant provides this information every month.
This tells you how much actual cash the business is generating month on month. This should show an increasing trend. If this shows a decreasing trend, then the startup is sliding down a slippery slope!
Your operating cash flow must become positive within the first year of operations. It shows that you are able to service your customers without drawing money from your debtors (loan) or your investors (equity). Remember that if your loan increases, your interest burden will drown you. If your investor’s equity increases you will progressively lose more and more of the ownership of your company.
2) Growth: All startups have to grow rapidly. Those that don’t will die. But, this must be real growth, with real paying customers. The metric for growth could vary across business types. The following are some typical growth metrics by business type:
• Social Networking : Growth in active users (%)
• E-Commerce : Growth in GMV (Gross Merchandise Value) (%)
• Retail business : No of footfalls; No of converted footfalls ; GMV
This metric should show a rising trend. While month on month growth is desirable, a good indicator of business health is a Trailing Six Month (TSM) growth metric. This shows how the parameter has moved over the last six months. This is nothing but the average (CARG)* growth in the previous six months. This should be reviewed every month.
3) Operating Costs: This metric tests if your costs are in control. A simple metric to use is CTS (Cost to Service). This is the percentage cost incurred by you to provide one unit of service(either in money or activity terms) in your business.
Let me illustrate with an example:
Assume you are a food delivery business. You are doing 20000 deliveries per month valued at Rs.100 Lakhs. Now add up all your costs of operations, viz., Salaries, Rent, Electricity, Transport, Telephone, Internet, etc. Let us say this totals to Rs.8 Lakhs per month. You can calculate your CTS as follows:
Cost to Service(CTS) = Rs.8 L /20000 = Rs.40 per delivery
or Rs.8L/Rs.100 L = 8% of revenue.
This cost to service must continually come down through higher productivity, greater efficiency etc. This is a measure of improvement in a critical factor for success.
Control metrics are a company’s vitals. They have to be watched all the time. They are the end result of all other activities of your company like business development, customer satisfaction, operational efficiency, procurement efficiency and HR. However, complex the operations, these simple control metrics will tell you if you are on track. They will ensure that your company is on a growth and profitability trajectory and not a downward spiral.
Happy and safe driving!