Six Finance Metrics That Matter in a Changing Economic Landscape

This new economic landscape requires CFOs to rethink the Key Performance Indicators (KPIs) they use to assess how successfully their companies perform.

New challenges related to accessing capital mean that KPIs on private companies need to focus on sustainable growth rather than on increasing valuations prior to new rounds of funding every 12-18 months. While metrics based solely on growth, such as annual and monthly recurring revenue, can still be helpful, they don’t tell the whole story as they don’t account for the likelihood of customer churn.

Instead, CFOs should incorporate more sophisticated KPIs that accurately record and forecast a combination of growth, payback, and churn rates. This will allow them to demonstrate their sustainability and increase the likelihood of securing further investment on favorable terms.

1. Committed Monthly Recurring Revenue (CMRR)

Committed Monthly Recurring Revenue (CMRR) is shown to be a more useful metric than Monthly Recurring Revenues (MRR).

Whereas MRR typically takes into account the value of monthly revenues from active contracts, CMRR considers the overall health of customer relationships. CMRR also takes into account customer churn and the likelihood of customers upgrading or downgrading services.

Since CMRR relies on a variety of factors specific to businesses, there isn’t a set way of calculating it. When developing their own CMRR metrics, CFOs should consider the impact of identifying opportunities to cross-sell services to customers and give attention to those at risk of not renewing services from under utilizing solutions.

2. Customer Acquisition Cost (CAC) Payback Period

The CAC payback period measures how long it takes to break even on the costs associated with acquiring new customers.

CFOs should be seeking to reduce these timeframes to demonstrate that investing in acquiring new customers is worthwhile due to them becoming profitable and utilizing solutions for the long term.

A CAC payback period of around five months to a year is generally considered good. Still, finance teams also need to consider the unique circumstances related to their companies, such as their sector and maturity.

Demonstrating a short and consistent CAC payback period makes it easy to justify increasing marketing budgets and spend, given the likelihood of a higher proportion of new customers being profitable. If your CAC payback period is getting longer, it may be a sign to recalculate your marketing and sales budget or tweak your pricing.

Calculating CAC:

CAC = Sales & Marketing Spend for a Given Period / Number of Customers Acquired during That Period

3. Customer Lifetime Value (CLTV)

CLTV gives an indication of whether customers are profitable over time.

While a short CAC payback period will help you break even quicker, you still want your customers to stay onboard as long as possible to maximize profits. An increasing CLTV indicates customers are happy with your product or service, making it easier to justify spend on account management and customer retention to grow revenues.

CLTV is often compared with CAC. A CLTV three times greater than your CAC is a commonly used benchmark.

Calculating CLTV:

CLTV = Average Revenue Per User (ARPU) / Customer Lifetime (in months)

4. Customer Churn 

Churn measures the number or percentage of customers that decide not to renew subscription-based services within a set period.

It’s a key metric to understand, as the loss of customers can negatively impact revenues. Churn is usually measured monthly and annually, with a higher churn rate meaning it will be more challenging to cover your customer acquisition costs.

An increasing churn rate suggests customers are dissatisfied with your product or service. If this appeals to you, you’ll need to engage with those customers to understand why to mitigate losing even more clientele. An excellent opportunity is to engage with customers when it’s time to renew contracts and upgrade or downgrade services.

Offering perks or discounts to customers you’re concerned will churn can also be an effective strategy.

Calculating Churn:

Churn = (Customers Lost During a Set Period / The Total Number of Customers at the Start of a Set Period) x 100

5. Burn Rate

With the recession likely stretching well into 2024, private companies need to extend their runway, so they are in a stronger position to negotiate further funding rounds once the economy picks up again.

Burn rate measures how quickly companies spend money and is an essential metric for new companies and startups that have yet to be profitable. It shows how much money companies are spending and how quickly they are spending it.

It can be measured on two different bases:

• Gross Burn – a measure of the total pending
• Net Burn – a measure of the net cash flow in relation to revenue

Calculating Burn Rate:

Net Burn =  The Cash Balance at the Beginning of a Period – Ending Cash Balance / Time Periods During Measurement

Gross Burn = Expenses / Time Periods During Measurement

6. Cash Flow

Cash is the lifeblood of any business, and running out of it is one of the most common reasons a business can fail.

This can be a problem for growing companies with increasing revenues if they cannot get their invoices paid fast enough to pay their creditors.

Finance leaders may need to review cash flow forecasts more frequently if the company is facing short or long-term cash deficits. The frequency will depend on your specific circumstances, but this can even be daily in extreme cases.

While companies may choose to do this themselves, this may also be a requirement placed on them by lenders or investors.

To fully understand the length of their runway, CFOs should review their cash flow, burn rate, and CMRR in relation to one another.

Calculating Cash Flow:

There are two different methods for calculating cash flow; direct and indirect.

Direct Method

The direct method measures cash inflows and outflows in the company. Statements start with brought-forward balances from the prior period, with all cash movements shown afterward, and then a closing balance reflecting these inflows and outflows.

Indirect Method 

The indirect method starts with the company’s net income from the income statement. This initial cash flows from the operating activities section and then shows adjustments to non-cash movements such as amortization, depreciation, and movement in inventories and trade payables.

This is then broken down into two separate sections reflecting cash flows related to investing and financing, with the last figure reflecting the net increase or decrease in cash movements.

Get Automation to Do the Heavy Lifting

Regular and close to real-time finance metrics allow CFOs to make better informed and more agile decisions to help steward their companies through these challenging times.

Using tools to automate core finance workflows and direct connections to non-financial information, such as CRM data, can help streamline the workload associated with these metrics.

Schedule a demo to learn more about how Tipalti’s automation solutions can transform your payables and finance metrics.

By Nick Levine

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Updated October 29, 2024