Ten Cash KPIs your Startup Should Track
Peter Drucker, often considered the father of modern business management, once said that “what gets measured gets managed.” By tracking key performance indicators (KPIs), businesses can gain valuable insights into their operations and make data-driven decisions that can help drive success.
Tracking the right KPIs can help startups stay on track and make informed decisions about how to allocate their limited resources. For example, venture capital (VC) investors often look at the same cash KPIs when deciding whether to invest in a startup. By tracking these metrics, startups can provide investors with the information they need to make informed decisions, and can also use the insights they gain to improve their own operations.
In this article, we will look at ten cash KPIs that every startup should track. These include metrics such as the Overdues Ratio, Free Cash Flow (FCF), Operating Cash Flow (OCF), and Days Payables Outstanding (DPO). We will also provide the formulas for each KPI, so you can start tracking them in your own business.
1. Cash Burn Rate
The Cash Burn Rate is a measure of how quickly a company is using up its cash reserves. It is calculated by dividing the company’s net cash outflow by the number of months in the period being measured. For example, if a company has a net cash outflow of $120,000 in a three-month period, its Cash Burn Rate would be $40,000 per month.
In general, a high Cash Burn Rate can be a cause for concern, as it may indicate that the company is spending more money than it is bringing in. This can be a sign of financial instability and may require the company to take action to reduce its expenses or raise additional funds.
However, a high Cash Burn Rate can also be a sign that a startup is trying to aggressively grow. In this case, the high spending may be necessary in order to invest in new initiatives or expand the business. In this situation, the startup’s management team will need to closely monitor the Cash Burn Rate and make sure that the company is generating enough revenue to support its growth plans.
2. Operating Cash Flow (OCF)
Operating Cash Flow (OCF) is a measure of a company’s financial performance that shows the amount of cash generated from its core business operations. It is calculated by adding non-cash expenses, such as depreciation and amortization, to the company’s net income.
For example, if a company has net income of $100,000 and non-cash expenses of $50,000, its Operating Cash Flow would be $150,000.
An increase in working capital does not need to be subtracted from the company’s net income when calculating Operating Cash Flow. The focus is on the cash generated from the company’s core business operations, not on the changes in its working capital. Therefore, the increase in working capital is not included in the calculation.
What are non-cash expenses?
Non-cash expenses are expenses that do not involve a cash outflow. These expenses, also known as “paper expenses” or “book expenses,” include items such as depreciation and amortization, which are recorded on a company’s financial statements but do not represent an actual cash outflow.
For example, when a company buys a piece of equipment, it is required to record the cost of the equipment as an expense on its income statement. However, the company does not actually spend any cash when it records this expense, as the cost of the equipment was incurred in a previous period.
This is an example of a non-cash expense.Non-cash expenses are important to consider when calculating a company’s Operating Cash Flow, as they can significantly impact the amount of cash generated from the company’s core business operations. By adding non-cash expenses to the company’s net income, we can get a more accurate picture of its cash flow and make more informed decisions about how to allocate its resources.
This is an important metric for startups to track, as it can provide valuable insights into the company’s financial health and help identify areas where changes may be needed to improve its financial performance. A high Operating Cash Flow indicates that the company is generating a significant amount of cash from its core business operations, which can be used to fund growth or pay dividends to shareholders.
On the other hand, a low Operating Cash Flow may indicate that the company is not generating enough cash from its core business operations, which could be a sign of financial distress. In this situation, the startup’s management team may need to take action to improve its operations or explore other sources of funding in order to improve the company’s financial health.
3. Free Cash Flow (FCF)
Free Cash Flow (FCF) is a measure of a company’s financial performance that shows how much cash is available for distribution to shareholders after accounting for capital expenditures. It is calculated by subtracting a company’s capital expenditures from its operating cash flow.
For example, if a company has operating cash flow of $100,000 and capital expenditures of $50,000, its Free Cash Flow would be $50,000.
What are capital expenditures?
Capital expenditures, also known as capex, are funds a company uses to acquire or upgrade physical assets such as property, buildings, equipment, or technology. These assets are expected to provide value to the company for multiple years, and are therefore considered long-term investments.
Capital expenditures are an important part of a company’s operations, as they can be used to improve its production capacity, expand its business, or increase its competitiveness. However, they can also be a significant drain on the company’s cash flow, as they require a large up-front investment that may not produce immediate returns.
To calculate a company’s capital expenditures, we need to look at its cash flow statement and identify the cash outflows that are related to the acquisition or upgrade of long-term assets. These cash outflows are then added to determine the total capital expenditures for the period being measured.
Capital Expenditures = Cash Outflows for Long-Term Asset Acquisitions or Upgrades
For example, if a company has cash outflows of $50,000 for the purchase of a new piece of equipment, $25,000 for the construction of a new building, and $10,000 for the upgrade of its computer systems, its total capital expenditures for the period would be $85,000.
Free Cash Flow is an important metric for startups to track, as it can provide valuable insights into the company’s financial health and help identify areas where changes may be needed to improve its financial performance. A high Free Cash Flow indicates that the company is generating more cash than it is spending on capital expenditures, which means it has excess cash available for distribution to shareholders or for reinvestment in the business.
On the other hand, a low Free Cash Flow may indicate that the company is not generating enough cash to cover its capital expenditures, which could be a sign of financial distress. In this situation, the startup’s management team may need to take action to reduce expenses or raise additional funds in order to improve the company’s financial health.
Overall, tracking Free Cash Flow can help startups stay on track and make informed decisions about how to allocate their limited resources. By understanding the factors that drive Free Cash Flow and monitoring it closely, startups can gain valuable insights into their operations and make data-driven decisions that can help drive success.
4. Cash Reserves in Days
Cash Reserves in Days is a key performance indicator (KPI) commonly tracked by startups that measures the length of time the company could continue to operate if its cash generation stopped abruptly. The formula to calculate this KPI is simple: it is the amount of cash reserves the company has, divided by its average daily expenses.
Both the value of Cash Reserves and the average daily expenses are metrics that can be found on the consolidated bank (and other financial account) statements.
A higher number of days indicates that the company has a larger cushion of cash to fall back on in the event of an emergency, while a lower number of days suggests that the company may be at risk of running out of money if it is unable to generate new cash quickly. It is important for startups to monitor their Cash Reserves in Days KPI closely, as it can provide valuable insight into the financial health and stability of the business.
5. Overdues Ratio
The Overdues Ratio is a key performance indicator (KPI) that measures the proportion of a company’s accounts receivable that are past due. This KPI is calculated by dividing the total value of overdue accounts receivable by the total value of all accounts receivable. The formula for the Overdues Ratio is as follows:
To calculate the Total Overdue Accounts Receivable, you will need to follow these steps:
- Identify the accounts receivable that are past due: Start by reviewing the accounts receivable ledger and identifying which accounts are past due, using the payment due date. These include accounts that have not been paid within the agreed-upon payment terms, as well as accounts that have been marked as delinquent or non-collectible.
- Determine the value of the overdue accounts: Next, determine the total value of the overdue accounts by summing up their values. Add up the outstanding balances on all of the accounts that are past due.
- Calculate the Total Overdue Accounts Receivable: Finally, to calculate the Total Overdue Accounts Receivable, divide the total value of the overdue accounts by the total value of all accounts receivable. This will give you the proportion of accounts receivable that are past due, which can be used to calculate the Overdues Ratio KPI.
The Overdues Ratio is important for startups because it provides insight into the effectiveness of the company’s credit and collections policies. A high Overdues Ratio indicates that the company may be struggling to collect payments from its customers, which can put a strain on its cash flow and affect its ability to grow and expand. By monitoring this KPI closely, startups can identify potential issues with their credit and collections processes and take action to improve them.
6. Days Inventory Outstanding (DIO)
Days of Inventory Outstanding (DIO) is a key performance indicator (KPI) that measures the number of days it takes a company to sell its inventory. This KPI is calculated by dividing the average inventory level during a period by the average daily cost of goods sold during the same period. The formula for Days of Inventory Outstanding is as follows:
To calculate the Average Inventory Level you will need to follow these steps:
- Determine the beginning and ending inventory levels: Start by identifying the beginning and ending inventory levels for the period you are measuring. This can typically be found in the company’s financial statements.
- Calculate the average inventory level: To calculate the average inventory level, you will need to add the beginning and ending inventory levels together and divide the result by two. This will give you the average inventory level for the period you are measuring.
To calculate the Average Daily Cost of Goods Sold you will need to follow these steps:
- Determine the total cost of goods sold: Determine the total cost of goods sold for the period you are measuring. This can typically be found in the company’s profit and loss statement.
- Calculate the average daily cost of goods sold: To calculate the average daily cost of goods sold, you will need to divide the total cost of goods sold by the number of days in the period you are measuring (needs to be the same period as used for calculating your inventory Level). This will give you the average daily cost of goods sold for the period.
Once you have calculated the Average Inventory Level and Average Daily Cost of Goods Sold, you can use these numbers to calculate the Days of Inventory Outstanding (DIO) KPI using the formula provided above. A high DIO indicates that the company may be carrying too much inventory, which can tie up valuable capital and lead to increased storage and carrying costs.
7. Days Sales Outstanding (DSO)
Days of Sales Outstanding (DSO) is a KPI that measures the average number of days it takes a company to collect payment for its sales. This KPI is calculated by dividing the company’s accounts receivable by its average daily sales. The formula for Days of Sales Outstanding is as follows:
Once calculated, Days of Sales Outstanding (DSO) KPI can provide valuable insights for startups and online businesses:
- Industry benchmarks: The first thing to consider when interpreting DSO is how your company’s DSO compares to industry benchmarks for other startups. For example, if the average DSO for ecommerce companies is 45 days, and your ecommerce businesses’ DSO is 50 days, it may be a sign that your credit and collections processes are not as effective as they could be.
- Historical trends: Another important factor to consider when interpreting DSO is how the KPI has changed over time. If your startup’s DSO has been consistently increasing, it may be a sign that your credit and collections processes are not as effective as they could be, and you may need to take action to improve them. On the other hand, if your DSO has been consistently decreasing, it may indicate that your credit and collections processes are improving and your company is on the right track.
- The impact on cash flow: Another key factor to consider when interpreting DSO is the impact on cash flows. A high DSO can put a strain on your company’s cash flow, making it difficult to meet financial obligations and invest in growth — because in simple terms: It just takes long until the cash hits your accounts. On the other hand, a low DSO can help to ensure that your company has a healthy cash flow and is able to grow and expand.
Monitoring DSO ca be mission critical for startups because it provides insight into the effectiveness of the company’s credit and collections policies. A high DSO indicates that the company may be struggling to collect payment from its customers, which can put a strain on its cash flow and affect its ability to grow and expand.
8. Days Payables Outstanding (DPO)
Days of Payables Outstanding (DPO) measures the average number of days it takes a company to pay its bills. This KPI is calculated by dividing the company’s accounts payable by its average daily purchases. The formula for Days of Payables Outstanding is as follows:
To calculate DPO, you will need to determine the company’s accounts payable and average daily purchases.
- Finding accounts payable: The accounts payable balance can typically be found in the company’s balance sheet or financial statements. It represents the total amount that the company owes to its suppliers for goods and services purchased on credit.
- Calculating average daily purchases: To calculate the average daily purchases, you will need to divide the total purchases made by the company during the period you are measuring by the number of days in the period. This information can typically be found in the company’s financial statements, specifically in the income statement or statement of operations, where you can find the revenue generated the period, as well as the total cost of goods sold. The difference between these two numbers represents the company’s gross profit, which is the amount of money it has made from its sales before accounting for other expenses such as operating costs, taxes. To determine the total purchases made by the company, you will need to subtract the company’s gross profit from its total revenue. This will give you the total amount that the company spent on purchasing goods and services from its suppliers during the period.
Tracking DPO is important for startups because it provides insight into the company’s cash management practices:
- A high DPO indicates that the company may be taking advantage of extended payment terms offered by its suppliers, which can help to improve its cash flow and give it more time to generate revenue.
- However, a high DPO can also put the company at risk of damaging its relationships with its suppliers if it consistently fails to make timely payments.
By monitoring this KPI closely, startups can identify potential issues with their cash management practices and take action to improve them. This can help to ensure that the company has a healthy cash flow and is able to meet its financial obligations.
9. Cash Conversion Cycle (CCC)
The Cash Conversion Cycle (CCC) measures the length of time it takes a company to convert its inventory into cash.
This KPI is calculated by adding the Days of Inventory Outstanding (DIO) to the Days of Sales Outstanding (DSO) and then subtracting the Days of Payables Outstanding (DPO). The formula for the Cash Conversion Cycle is as follows:
This KPI is important for startups because it provides insight into the efficiency of the company’s operations and turning assets into cash. For an online business, different CCC values can indicate different things:
- A low CCC: A low CCC indicates that the online business is able to quickly convert its inventory into cash. This can be a sign of efficient operations and a healthy cash flow. It may also indicate that the business is able to meet the demand for its products and services quickly, which can help to improve customer satisfaction and loyalty.
- A high CCC: A high CCC can indicate that the online business is taking longer than necessary to convert its inventory into cash. This can put a strain on the business’s cash flow and make it difficult to meet its financial obligations and invest in growth. A high CCC may also indicate that the business is not able to meet the demand for its products and services quickly, which can lead to customer dissatisfaction and lost sales.
Overall, interpreting CCC values for an online business requires considering the impact on the business’s operations, supply chain, cash flow, and customer satisfaction.
10. Average days delinquent
Average Days Delinquent (ADD) measures the average number of days that a company’s accounts receivable are past due. This KPI is calculated by dividing the total number of days that accounts receivable are past due by the total number of accounts receivable. The formula for Average Days Delinquent is as follows:
A high ADD indicates that the company may be struggling to collect payment from its customers, which can put a strain on its cash flow and affect its ability to grow and expand.
Now, there is another definition for Average days delinquent that is commonly used by investors to understand the revenue efficiency of startups. In this second version, Average Days Delinquent subtracts the Best Possible Days Sales Outstanding (BPDSO) from the Days Sales Outstanding (DSO). The formula for this variation of ADD is as follows:
The Best Possible Days Sales Outstanding (BPDSO) represents the minimum number of days that a company’s accounts receivable would be past due if all of its customers paid on time. In other words, it is the best-case scenario for the company’s credit and collections processes. By subtracting the BPDSO from the DSO, this variation of the ADD formula attempts to isolate the portion of the DSO that is due to customers who are consistently paying late.
There is merit to this second variation of the ADD formula, as it can provide insight into the portion of the DSO that is caused by late-paying customers. However, it is important to note that the BPDSO is a theoretical concept and may not accurately reflect the reality of a company’s credit and collections processes.
As a result, this second version of the ADD formula may not provide a complete or accurate picture of the company’s credit and collections performance, but can be used for management discussions.
It is generally recommended to use the standard ADD formula, which divides the total number of days that accounts receivable are past due by the total number of accounts receivable, as it provides a more complete and accurate measure of the company’s credit and collections performance.
Cash KPIs that investors care about
By monitoring these KPIs closely, startups can gain valuable insight into their cash management practices and identify potential issues with their operations, credit and collections policies, and cash flow. Rest assured, their potential investors will too.
This can help them to take action to improve these areas and ensure that they have a healthy cash flow and are able to meet their financial obligations and invest in growth.
To sum up:
Cash Burn Rate: This KPI measures the rate at which a company is using up its cash reserves. It is calculated by dividing the companys net cash outflow by the number of days in the period being measured. A high cash burn rate can indicate that the company is spending more money than it is generating, which can put a strain on its cash flow and financial stability.
Operating Cash Flow:This KPI measures the amount of cash that a company generates from its core business operations. It is calculated by adding up the companys net income, depreciation and amortization, and changes in working capital. A healthy operating cash flow can indicate that the company is generating enough cash from its operations to meet its financial obligations and invest in growth.
Free Cash Flow: This KPI measures the amount of cash that a company has available for investments and other purposes after accounting for its operating expenses and capital expenditures. It is calculated by subtracting the companys capital expenditures from its operating cash flow. A positive free cash flow indicates that the company has excess cash available for investments and other purposes, while a negative free cash flow indicates that the company is using up its cash reserves to fund its operations and capital expenditures.
Cash Reserves in Days: This KPI measures how long (in days) a startup could survive if its cash generation stopped immediately. It is calculated by dividing the companys cash reserves by its average daily expenses.
Overdues Ratio:This KPI measures the percentage of a companys accounts receivable that are past due. It is calculated by dividing the total amount of accounts receivable that are past due by the total amount of accounts receivable.
- Total Overdue Accounts Receivable:This KPI measures the total amount of a companys accounts receivable that are past due. It is calculated by adding up the amounts of all of the companys accounts receivable that are past due.
Days of Inventory Outstanding:This KPI measures the average number of days it takes a company to sell its inventory. It is calculated by dividing the companys inventory by its average daily cost of goods sold.
- Average Inventory Level:This KPI measures the average amount of inventory that a company holds. It is calculated by dividing the total inventory held by the company during the period being measured by the number of days in the period.
- Average Daily Cost of Goods Sold:This KPI measures the average daily cost of the goods sold by a company. It is calculated by dividing the total cost of goods sold by the company during the period being measured by the number of days in the period.
Days of Sales Outstanding: This KPI measures the average number of days it takes a company to collect payment for its sales. It is calculated by dividing the companys accounts receivable by its average daily sales.
Days of Payables Outstanding: This KPI measures the average number of days it takes a company to pay its bills. It is calculated by dividing the companys accounts payable by its average daily purchases.
Cash Conversion Cycle: This KPI measures the length of time it takes a company to convert its inventory into cash. It is calculated by adding the Days of Inventory Outstanding (DIO) to the Days of Sales Outstanding (DSO) and then subtracting the Days of Payables Outstanding (DPO).
Average Days Delinquent:This KPI measures the average number of days that a companys accounts receivable are past due. It is calculated by dividing the total number of days that accounts receivable are past due by the total number of accounts receivable.
