# 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, just 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 of time before excluding any expenses.

**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).