Financial Analysis for Startups: Financial KPIs and Examples
Financial analysis for startups
This article describes the most important financial KPIs that should be used by the startup’s owner to analyze the activity of the company from the financial point of view.
Understanding them, you can even compare the attractiveness of different projects for investment. How to compare different projects using financial analysis for startups will be also shown here.
In addition, you will see how to present the financial data to investors in a pitch deck.
Important financial KPIs for startups:
Let’s analyze the main financial ratios for startups
1. Revenue calculation
Revenue is calculated by multiplying the price of the good or service by the quantity sold.
Revenue = Price * Quantity
For example, if a company sells 1000 units of a product at $5 per unit, the company’s revenue would be $500.
Revenue = $5*1000=$5000
If you need to calculate revenue for several products, summarize revenue from each product or service.
For example, a company sold for January:
- 1000 units of product 1 at $5 per unit
- 100 units of product 2 at $15 per unit
- 27 units of product 3 at $100 per unit
The total revenue = $5 *1000+ $15 *100+ $100 *27= $9200
As you can see revenue shows the total income of a company for a certain period before excluding any expenses.
Understanding revenue and its growth is key in financial analysis for startups, as it helps project owners and investors evaluate the company’s value.
This evaluation determines what percentage of the company should be exchanged for the necessary investments. Investors receive this share in return for providing the funding required to grow and develop the business.
📖 Read more in the article: Create Fast Startup Valuation for Investors with the Help of ARR
In addition, this article will help you understand how to forecast sales volume and revenue, even without historical data, if your project is still in the launch stage: In-depth Guide to Sales and Revenue Forecast for Startups
2. Gross profit calculation with an example
Gross profit is calculated by subtracting the cost of goods sold (or variable costs) from the total revenue.
Gross profit = total revenue – COGS
Gross profit = total revenue – COGS = total revenue – variable costs = total revenue – variable cost per unit * Quantity of units sold
For example, if a company has $5000 in sales for 1000 units and its variable cost per unit is $2, then its gross profit would be $3000.
3. Net profit calculation with an example
Net profit is calculated by deducting a company’s total expenses from its total revenue. Net profit is also known as net income or net earnings.
Net profit = total revenue – total expenses
Net profit = total revenue – total expenses= gross profit – fixed monthly expenses
If a company has a gross profit of $3000 and its operating expenses are $1000, then its net profit would be $2000.
4. Profit margin calculation
Profit margin: This ratio measures a company’s profitability or the percentage of its sales that it converts into profits. The profitability of a startup depends on its ability to generate revenue and profits.
Profit Margin = Net profit / Total revenue * 100%
If a company has a net profit of $2000 and its total revenue is $5000, then its profit margin would be 40%.
A profit margin of less than 5 -15 % indicates that a company is not very profitable, while a profit margin of greater than 25 – 35 % indicates that a company has high profitability.
Payback period = number of months or years to return the initial investment
5. Payback period calculation
Payback period is the amount of time it takes for the startup to recoup its initial investment. To calculate the payback period, we divide the initial investment by the startup’s profits (or operating cash flow).
If a company has a net profit of $2000 per month and its total investments are $36000, then its payback period would be 18 months or 1 year and a half.
6. ROI calculation
ROI is the return on investment, which measures the profitability of the startup relative to its initial investment. To calculate the ROI, we divide the startup’s profits by the initial investment.
ROI=Net profit / Total investment * 100%
If a company has a net profit of $2000 per month and total investments of $36000, then its ROI would be 67% per year.
If you would like to calculate ROI for the whole period of the project, not only one year, simply divide the total net profit for all forecasted or actual years by the total investment.
7. Break-even point calculation
The break-even point is the point at which a company’s total revenue is equal to its total costs.
Break-even point = Fixed monthly expenses / ( Price per unit – Variable costs per unit)
Assuming a startup has a fixed cost of $1,000 per month and a variable cost of $2 per unit sold and the price per unit is $5, the startup would need to sell 2,000 units to cover all monthly expenses (fixed and variable).
Break-even point = 1000/(5-2)= 333 units per month.
8. IRR calculation
IRR is the rate at which the present value of the cash flows from the project is equal to the initial investment in the project.
You can calculate the Internal Rate of Return (IRR) in Excel using the IRR function. This function calculates the internal rate of return for a series of cash flows that occur at regular intervals. The cash flows do not have to be even, but they must occur at regular intervals.
The syntax of the IRR function is as follows:
IRR(values, [guess])
In our example, net profit is $2000 per month ($2000*12 months= $24000 per annum) and we have initial investments of $36000. Let’s suppose that the project duration is 4 years. So net profit will be received $24000 per annum during 4 years.
Let’s add this information for IRR calculation in Excel:
| A | B | C | D | E | |
| 1 | -36000 | 24000 | 24000 | 24000 | 24000 |
| 2 |
The formula of the IRR function is as follows: IRR(A1:D1)
The result of this formula calculation is 55%.
Comparison of projects with the help of financial analysis for startups
Let’s see in the example how financial KPIs help to assess the attractiveness of projects. You can find below the financial KPIs of 2 different projects. We have already done calculations for Project 1.
| Financial ratios | Project 1 | Project 2* | Explanation |
|---|---|---|---|
| Revenue | $5000 per month*12 months= $60000 per annum | $300000 per annum | |
| Net profit | $2000 per month*12 months= $24000 per annum | $186000 per annum | |
| Profitability | 40% | 62% | Profitability will be the same for a month or a year in this case |
| ROI | 67% per annum | 93% per annum | |
| Payback period | 18 months | 13 months | |
| Break-even point | 333 units per month | 29 units per month | |
| IRR | 55% | 87% | |
| Initial investments | $36000 | $200000 |
* Here is the initial data for Project 2, so you can try to calculate financial KPIs on your own:
– Price per unit: $100;
– Variable costs per unit: $30;
– Sales per month: 250 units;
– Fixed monthly costs: $2000;
– Initial investments: $200 000;
– Project duration: 4 years.
Conclusion: You can see that Project 2 is more attractive than Project 1, as it has higher profitability, ROI, IRR, and less payback period. But it needed more money for its launch ( $200 000 instead of $36 000).
Additional KPIs in financial analysis for startups: understanding and calculating
In addition to the foundational financial metrics previously discussed, startups must closely monitor several other key performance indicators (KPIs) that play a crucial role in ensuring long-term success and sustainability. These KPIs, including the burn rate, runway, customer acquisition cost (CAC), and the lifetime value (LTV) of a customer, are not only vital for internal financial analysis but are also often highlighted in pitch decks for presentations to investors. Understanding and accurately calculating these metrics can significantly impact a startup’s ability to secure investment by demonstrating a clear grasp of the business’s financial health and growth potential.
1. Burn Rate measures the rate at which a startup expends its venture capital before generating a positive cash flow. It indicates the startup’s cash consumption rate and is critical for assessing financial sustainability.
Example Calculation: If a startup has monthly operational costs of $50,000, its burn rate is $50,000 per month.
2. Runway estimates how long a startup can continue operating at its current burn rate with its remaining capital. It’s a direct reflection of the startup’s short-term financial health and operational viability.
Example Calculation: With $500,000 in reserve and a monthly burn rate of $50,000, the startup’s runway is 10 months ($500,000 / $50,000).
3. Customer Acquisition Cost (CAC) quantifies the cost associated with acquiring a new customer. This metric is essential for evaluating the effectiveness of marketing strategies and the financial implications of expanding the customer base.
Example Calculation: A marketing expenditure of $10,000 that results in 100 new customers equates to a CAC of $100 per new customer ($10,000 / 100).
4. Lifetime Value (LTV) of a Customer forecasts the total revenue a business can expect from a single customer for their relationship. Understanding LTV is crucial for determining the profitability of investing in customer acquisition and retention.
Example Calculation: An average customer who spends $50 monthly over three years has an LTV of $1,800 ($50 * 12 months * 3 years).
Incorporating these KPIs into pitch decks for investor presentations is vital, as they succinctly communicate the startup’s operational efficiency, financial stability, and long-term profitability. Demonstrating a solid understanding of these metrics can greatly enhance a startup’s appeal to potential investors, showcasing the founders’ comprehensive approach to financial planning and their commitment to sustainable growth.
Conclusion for financial analysis for startups
In conclusion, mastering financial analysis through a comprehensive understanding of key performance indicators (KPIs) is not just beneficial but essential for startups aiming to carve out a niche in today’s competitive market landscape. From the foundational metrics of revenue, gross profit, and net profit to the nuanced calculations of burn rate, runway, CAC, and LTV, each KPI serves as a critical beacon, guiding startup owners toward informed decision-making, strategic planning, and ultimately, sustainable growth.
Moreover, the ability to effectively communicate these financial metrics, especially in investor presentations, can significantly enhance a startup’s appeal to potential investors. It demonstrates not only the startup’s financial viability but also the founders’ depth of understanding of their business’s financial health and their commitment to driving profitability. Therefore, incorporating these KPIs into your pitch decks, backed by clear calculations and projections, can make a compelling case for the value and potential return on investment your startup offers.
This article has walked you through the meaning and calculation of each KPI, providing you with the tools to analyze your startup’s financial performance comprehensively. However, remember, financial analysis is an ongoing process. As your startup evolves, so too will your financial needs and strategies. Regularly revisiting these KPIs, refining your financial model, and staying attuned to the financial pulse of your business are key to navigating the challenges and opportunities that lie ahead.
Embrace these financial metrics as both a lens through which to view your startup’s current state and a map guiding your journey toward future success. By doing so, you empower your startup not just to survive but to thrive, securing its place in the dynamic ecosystem of innovation and entrepreneurship.
Frequently asked questions on financial analysis for startups
What is financial analysis in the context of startups? Financial analysis for startups involves examining financial statements, trends, and metrics to assess the financial health, performance, and potential of a startup. It helps entrepreneurs and investors make informed decisions about the business’s viability and growth prospects.
Why is financial analysis critical for startups? For startups, financial analysis is crucial because it provides insight into cash flow management, profitability, and the efficient use of resources. It also helps startups identify financial strengths and weaknesses, enabling strategic planning and adjustments for sustainable growth.
What are some key financial metrics startups should track? Startups should monitor several key financial metrics, including cash burn rate, runway, gross margin, net profit margin, customer acquisition cost (CAC), lifetime value (LTV) of a customer, and return on investment (ROI). These metrics provide valuable insights into the startup’s financial health and operational efficiency.
How do startups perform financial analysis? Startups perform financial analysis by collecting and reviewing financial data from their operations. This involves analyzing balance sheets, income statements, and cash flow statements, often with the help of financial software or a financial analyst, to evaluate financial performance and make predictions about future financial health.
How can financial analysis help startups attract investors? A thorough financial analysis can help startups attract investors by demonstrating the business’s potential for profitability, sustainable growth, and effective management of resources. It provides a solid foundation for pitching to investors, showcasing the startup’s value proposition and potential return on investment.
Can a startup conduct financial analysis without a finance background? Yes, startups can conduct basic financial analysis without a finance background by using financial planning and analysis software designed for non-financial users. However, for complex analysis, it may be beneficial to consult with a financial analyst or accountant.
What is the difference between financial analysis and financial planning? Financial analysis is the process of evaluating a startup’s financial data to understand its current state, while financial planning involves setting financial goals and creating strategies to achieve them. Analysis informs planning by identifying areas of strength and opportunities for improvement.
How often should startups conduct financial analysis? Startups should conduct financial analysis regularly, at least quarterly, to keep track of their financial performance and make timely adjustments to their strategies. More frequent analysis may be necessary in rapidly changing markets or during critical growth phases.
What common mistakes do startups make in financial analysis? Common mistakes include underestimating expenses, overestimating revenue, neglecting cash flow management, failing to adjust financial projections based on actual performance, and not considering external market factors that could impact financial performance.
Where can startups find resources or help for conducting financial analysis? Startups can find resources for financial analysis from business incubators, startup accelerators, business mentors, online courses, financial analysis software, and professional financial analysts specializing in startup finance.
About the author
Kateryna Moskovenko
Financial Consultant with 12 years’ experience in accounting, management accounting and financial modeling; Founder of Fiscra; Author of courses and trainings in financial modeling, business planning, and entrepreneurship; prepared more than 50 financial models for startups.
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