The only way to truly understand the health and trajectory of a startup is to measure and monitor the metrics that matter. Founders must maintain continuous monitoring of key financial indicators.
With this in mind, here are 12 of the most revealing financial metrics every startup needs to monitor:
CAC = Total Sales and Marketing Expenses / Number of New Customers Acquired
Customer acquisition cost measures the total sales and marketing spending required to acquire each new customer. Sometimes calculated monthly or by channel, an increasing or excessively high CAC indicates inefficient spending on customer growth. A low and decreasing CAC shows greater efficiency in acquiring and converting new customers. For example, a startup that spends $60,000 on sales and marketing per month to acquire 300 new customers would have a CAC of $200 ($60,000 / 300 new customers).
LTV = Average Order Value x Purchase Frequency x Average Customer Lifetime
Lifetime value represents the average revenue generated by a customer throughout their relationship with the startup. To maintain profitable unit economics, LTV must exceed CAC. Improving subscription retention and renewals directly increases lifetime value. For example, a customer who spends an average of $500 annually on a startup’s products, purchases twice a year, and remains a customer for 5 years would have an LTV of $5,000. ($500 average order value x 2 annual purchases x 5 years of customer life).
Churn Rate = Number of Customers Lost in the Period / Total Customers at the Beginning of the Period
The churn rate shows the percentage of customers lost or estimated to be lost in a given period. Highlight weaknesses in product fit, customer success, or retention processes. Reducing churn increases customer lifetime value. Negative churn is possible when expansion revenue exceeds lost revenue. For example, a startup that loses 75 of 1,000 total customers in a quarter would have a quarterly churn rate of 7.5% (75 customers lost / 1,000 total customers).
Revenue Growth Rate = (Current Period Revenue – Previous Period Revenue) / Previous Period Revenue
The revenue growth rate measures the percentage increase in a startup’s revenue compared to the same period the previous year. Shows the startup’s momentum. High and accelerated growth indicates strong product-market fit and high demand. Low or declining growth signals potential problems with the product or market strategy.
For example, a startup that increases its revenue from $2 million to $4 million year over year would have a revenue growth rate of 100% (($4 million current revenue – $2 million previous revenue) / $2 million previous revenue ) x 100 = 100% growth.
Gross Margin = (Revenue – Cost of Goods Sold) / Revenue
Gross margin is the revenue left after accounting for the direct costs of goods sold. Reveals the efficiency and profitability of delivering the product to customers. Higher gross margins allow operating costs and investments to be redirected toward growth. For example, a software startup with $10 million in revenue and $1 million in cloud hosting and payment processing costs would have a gross margin of 90% (( $10 million in revenue – $1 million in COGS) / $10 million in revenue = 90% gross margin).
Burn Rate = Total Monthly Expenses – Monthly Income
The burn rate is the net amount of cash spent per month on all expenses and areas of the business. A high or increasing burn rate quickly depletes the startup’s cash flow. A low, controlled burn extends operating time.
For example, a startup that spends $150,000 a month on salaries, marketing, hosting costs, etc., but generates only $50,000 in monthly revenue, would have a monthly burn rate of $100,000 ($150,000 in expenses – $50,000 in revenue).
Cash Time = Current Cash Balance / Monthly Burn Rate
Cash time represents the number of months a startup can continue operating before depleting its cash at the current burn rate. Extending cash time provides more time to reach milestones and raise additional funds. 6–12+ months of cash time is recommended if possible.
For example, a startup with $500,000 in cash reserves and a monthly burn rate of $100,000 would have 5 months of cash time remaining ($500,000 cash balance / $100,000 monthly burn rate = 5 months of cash time).
The sales pipeline tracks all potential deals that move through the sales process from initial contact to close. It represents speed and transactional momentum. A growing pipeline shows revenue momentum, while a declining pipeline indicates future risks.
Days of Accounts Receivable = Average Accounts Receivable / (Revenue / Number of Days)
Days accounts receivable or days sales outstanding indicate the average number of days it takes to collect payment from customers. Lower days improve cash flow, while higher days could signal collection issues.
For example, a startup with $100,000 in accounts receivable at the end of the quarter and $1.2 million in quarterly revenue would have 30 days of sales outstanding ($100,000 AR / ($1.2 million revenue / 90 days)).
ROI = (Profit on Investment – Cost of Investment) / Cost of Investment
ROI measures the profit or return generated by each dollar invested in the startup. A higher ROI indicates efficient use of invested capital. Improving ROI also increases investor confidence.
For example, if a $100,000 investment generates $250,000 in profit, the ROI would be 150% (($250,000 profit — $100,000 cost) / $100,000 cost).
Contribution Margin = Income – Variable Costs
Contribution margin represents the revenue remaining after covering the direct variable costs related to each sale, to contribute to fixed costs. Higher contribution margins mean that each sale contributes more to profitability.
For example, software sales of $1 million with associated payment processing and cloud hosting costs of $150,000 would have a contribution margin of 85% ($1 million revenue — $150,000 variable costs).
Customer LTV = (Average Order Value x Profit Margin %) x (Purchase Frequency) x (Average Retention Time)
Customer lifetime value (LTV) indicates the average profit earned from a customer over the entire life cycle of their relationship with the startup. LTV can be increased by improving pricing, retention period, and cost efficiencies.
For example, a customer with an average order value of $500, a 25% profit margin, 2 annual purchases, and a 5-year retention would have an LTV of $2,500 ($500 order value x 25% margin x 2 purchases annually x 5 years).
In addition to the essential metrics mentioned above, here are eight more sophisticated metrics that startups might want to monitor as they grow:
1. Customer Acquisition Cost Ratio (CAC Ratio):
Although the CAC shows the cost of customer acquisition, the CAC ratio or efficiency ratio indicates the profitability of the payback period. To calculate it, divide the LTV by the CAC. A ratio greater than 3 is generally positive.
2. Gross Margin Percentage:
Gross Margin Percentage = (Revenue — Cost of Goods Sold) / Revenue.
Gross margin percentage simplifies the analysis of gross margin by converting it to a percentage. It should be tracked over time to identify changes in profitability.
3. Operating Costs as a Percentage of Revenue:
Operating Costs % of Revenue = Total Operating Costs / Revenue.
This metric shows what proportion of revenue is consumed by operating expenses such as salaries, rent, and utilities. A lower percentage is better for profitability.
4. Customer Acquisition Cost Recovery Period (CAC Payback Period):
CAC Recovery Period = CAC / Gross Profit per Customer.
This metric shows how long it takes to recover CAC through gross customer profit. A faster recovery period is better
A B2B SaaS startup selling $50,000 annual enterprise subscriptions could track:
- CAC: $5,000 in average sales and marketing costs per new $50,000 customer
- LTV: $250,000 with an average useful life of 5 years and a gross margin of 90%
- Churn: 7% monthly subscription cancellation fee
- Revenue Growth: 120% YoY growth to $5 million ARR
- Burn Rate: $120,000 per month, mainly in salaries and advertising expenses
- Cash Runway: 11 months based on cash reserves of $1.5 million
These metrics help founders understand payback period profitability, retention challenges, and sufficient funding headroom.
A B2C ecommerce startup selling products with an average order value of $80 and a gross margin of 50% could measure:
- CAC: $20 to acquire a customer who makes an average of 2 purchases
- LTV: $100 in an average period of 1 year with 2 purchases
- Churn: 20% of customers who do not return after the initial purchase
- Revenue Growth: 30% YoY increase from revenue of $800,000
- Contribution Margin: $40 per order after variable costs
- Burn Rate: $150,000 per month, mainly in advertising and payroll
Metrics indicate that more focus on retention is needed to improve LTV and reduce CAC payback period.
Once startups establish tracking of key financial metrics, they must establish performance goals or objectives to achieve. Benchmarking yourself against industry standards or your peers provides initial guidance. From there, founders can define more ambitious goals.
Examples of initial financial metrics goals for a typical B2B SaaS startup:
- Gross Margin: 80%+
- Revenue Growth Rate: 25–35%+
- Churn Rate: Less than 5% monthly
- CAC Recovery Period: 18 months or less
- Burn Rate: Maintain 7 to 8 months of cash margin
- Sales Efficiency: $0.70 of sales spend for every $1 of ARR
Objectives provide quantitative goals for teams and accountability. As metrics are achieved, goals can become increasingly ambitious.
Defining minimum, expected and aspirational levels from the beginning can help manage uncertainty.
When reporting these metrics to your team, managers or investors, be sure to:
- Establish a cadence: Share metrics consistently weekly, monthly or quarterly depending on audience.
- Add context: Explain why metrics matter, how goals were set, and offer strategic ideas instead of just posting numbers.
- Establish narrative: Set up the broader story about why metrics are going up or down and what it means in general terms.
- Focus on ideas: Don’t just report metrics, but highlight key points, insights, and actions based on the data.
- Segment audiences: Tailor metrics reports and dashboards for different groups such as sales, product teams, executives, etc.
Proactively communicating metrics and trends prepares the startup to respond quickly. But avoid alert fatigue. Focus on the critical KPIs that matter most.
With the right systems and discipline around financial metrics, data becomes a key competitive advantage that guides business strategy and execution. Metrics transform guesswork into a science of growth. Hence, the importance of monitoring
