There has been a lot of talk about the various ratios, margins, monthly revenue growth, revenue run rate, burn rate etc., to measure the financial health of a company. Financial analysis is an excellent way to get a quick snapshot of the company’s financial performance and helps measure the degree of deviation from its set targets and commitments.
However, especially in the case of startups, the performance of the company cannot be judged only by an analysis of the financials. Not that it is unknown to us that at the initial stage the business concentrates on establishing itself and acquiring more customers. The focus is not entirely on turnover growth and profitability, as in the case of any established corporate. At this stage, the company has to spend a lot, with no immediate revenue inflows.
It is not all about balance sheets and spreadsheets
“Non-financial metrics are the leading indicators of the company’s health. These metrics are different for different industries and definitely important,” says Alok Goyal, Managing Director, SAIF Partners.
Thus, to evaluate a new business thoroughly, one needs to look at the softer non-financial aspect as well as have a 360-degree view. Also, entrepreneurs themselves get so involved in balance sheets and numbers to present to investors that they start undermining the importance of gauging the business performance, and development metrics at regular intervals to measure success. Businesses need to keep a track of their own performance more than anyone else's. “There are some departments where financial matrix does not work. How will we evaluate the performance of product team/tech team? Hence, some of the departments have non-financial score cards,” says Adhil Shetty, CEO and Co-founder, bankbazaar.com.
Metrics to monitor success
Non-financial metrics help understand the drivers of financial results and look at all aspects of the business. Some of the major metrics are:
- Market share: One very apparent metric that shows the strength of the business is market share. Acquiring market share helps businesses attain economies of scale, manoeuvre trends and becomes powerful to influence market. It has been historically accepted that substantial market share is directly relevant to RoI, as achieving economies of scale helps improve operating margins. Gauging the market share helps the business chart its growth and access its power.
- Customer satisfaction: Acquiring a customer is just half a battle won, and retaining him/her is equally challenging. The resources spent in acquiring a customer cannot be justified if the business is unable to retain. The cost of acquisition of customer is 5-10 times more than his retention. Various tools like NPS, CSAT, and CES have been developed to measure the customer satisfaction. Businesses can develop their own methods, check points and surveys and focus groups to gauge the customer satisfaction and record repetition of orders. “The most important metrics to look at is customer satisfaction. Ultimately, this is what drives growth,” says Anand Jain, Founder, CleverTap. “Our satisfied customer, through word-of-mouth publicity, helped us get 2,200 more customers on board,” he added.
- Employee loyalty: Human resource is one of the most important resources for any organisation, and an important metrics to be monitored. In a startup scenario, employees form the foundation of the company. It’s important to get the most motivated, innovative, and vibrant minds on board and retain them. We can read stories about Shrey Gupta of OYO Rooms, Korath Paul of Freecharge, Gaurav Anand of f1Circle and so on, to realise how employees helped turn around businesses. Employee loyalty is directly linked to customer loyalty and business profitability. Expectations should be clearly communicated, growth and development opportunities must be presented, and fair compensations are some methods of managing employee retention.
- Innovative index: Lack of innovation can bring down mammoth companies. We all remember seeing Blackberry been wiped out in a matter of time. Measuring innovation is a tough job, but gauging stagnancy is simpler. Businesses need regular introspection to see if they are abreast trends and altering their approach as required by current demand. A close watch over competition can also help businesses understand where they are going wrong.
- Product metabolism: A new metric, this watches the speed at which a decision is made and rolled out. In case of a startup, decisions need to be made quickly, and implementation is crucial. The business has to hit the right equilibrium of the product metabolism rate; too slow might lead to losing customers and opportunities, too fast might prove to be detrimental to employees’ motivation and lead to frustrations.
- Conversion rate: Businesses need to first flag the metric to measure the conversion rate depending upon the nature of business. For example, new subscriptions, downloads, renewals etc. This metrics helps understand the flaws or strengths of the product and what attracts or sends customer away and amend the strategy accordingly. A high conversion rate indicates that customers like the product in the first exposure and slow rate shows that it needs more improvement.
- Referral rate: Many websites and publications have a 'refer' tab, where the customer can refer the product to a friend. There are also some incentives attached to referring, like a free order or a Rs 100 off. This helps the business collect data and helps go viral. The higher the referral rate, the more the CAC goes down, which means companies are spending less to acquire a customer. “Repeat customers gives you revenue without any customer acquisition cost. Not only this, they also refer the brand to many others, which again increases the customer base without any extra cost,” explains Adhil. Recommendation from a friend always has more weightage than an advertisement in the corner of the page, which one usually won’t even look at.
Though very crucial, these metrics are hardly monitored by businesses. These are excellent indicators of the cause-and-effect link with the P&L and Balance Sheets of the business. Where accounting fails to cover these metrics, these aspects, when measured, are useful to all involved parties, from owner, to investor and employee. “The non-financial score cards are linked to the financial score cards at a macro level. Management gets the understanding of the business’s progress through these metrics even before the financial metrics are evaluated,” says Adhil. Finding links between the non-financial metrics and the financial results, validating them and forming strategies accordingly can help businesses take well-informed and measured steps.
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- Consumer behaviour
- Conversion Rate
- Loyalty business model
- Customer satisfaction
- Adhil Shetty
- startup metrics
- non financial metrics
- gauge business
- market share
- judge startup
- referral rate
- product metabolism