Financial Metrics for the Growth Phase
The growth phase is the second phase or stage of business’s life cycle. Sometimes called the perseverance or survival stage. The main problem a business in this stage faces is understanding the relationship between revenue, expenses, and cash flow. The entity usually has enough revenue to match expenses but struggles with enough cash flow consistently to cover debt obligations and finance growth. Returns on time and capital are marginal and the owner is still filling many seats in the business. The primary KPIs a company in this phase needs to monitor are KPIs that drive growth – how are we reaching prospective customers and how are we monetizing them? From a financial perspective, some of the most metrics a company in this phase should be monitoring:
1. CLV:CAC – lifetime value of the customer to customer acquisition cost ratio. Generally, this ratio, in many industries, needs to be 3:1 for sustainability. Determine what the ratio is in your industry and modify as necessary for your particular business for business sustainability. (customer lifetime value is average sales amount times number of transactions times gross margin times retention rate) (customer acquisition costs is total expenses to acquire customers divided by total number of customers acquired)
2. Monthly recurring revenue increasing. MRR generally will increase when there is a repeatable sales strategy, understanding your most effective lead channels and addressing pain points in the sales funnel. Sales and fulfillment processes should be documented, followed, and improved.
3. Gross margin increasing. Gross margin is your net revenue less the cost of goods sold. Net revenue is your gross revenue less discounts and returns. Cost of goods sold are the costs directly related to the production of the product or service (generally material and labor). If your gross margin is increasing, you are able to keep more of your capital to pay administrative costs, debt obligations and for future investment. This can be done in several ways such as changing the pricing model, decreasing churn, decreasing discounts, decreasing returns, decreasing costs to produce the product or service, increase efficiency and good internal systems and processes to control inventory.
4. Break even point – there are three general methods to calculate the break even point but generally this is the amount of revenue needed to cover both fixed and variable costs.
5. Cash runway – the length of time which a company can remain solvent. Answers the question… how long can we operate with the cash we have? Calculation (cash/burn rate). If this number is not lengthening, the business will not progress to the next stage and will eventually regress to the start-up phase and most likely fail altogether. The break even point focuses on the P&L whereas the cash runway will pull in the cash needed to pay debt obligations as well.
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