How To Measure Your Startup’s Performance (Pt. 1)

A lot of times you hear from experienced entrepreneurs who take decisions only based on their gut feeling. Well, they can rely on their gut, because they have run their business for a long time and know their company by heart. But me personally, I think that this is not always true. Most entrepreneurs rely on facts and figures.

Finance is one of the basic pillars for building a successful company, especially in the beginning when cash is always short. At the end, the ultimate goal of every startup is to generate growth and profits. And finance is the key for both, measuring and ultimately reaching that goal. The most important answer that a company’s finances can provide is the assessment of success: How successful is a company performing in the market?

Most founders are specialists in their very own fields and are neither a Chief Financial Officers nor do they have a financial degree. Surely, this is not a prerequisite to bring forward their product or their idea. Furthermore, most founders will pay a tax advisor or an accountant to do the “boring” paperwork. Nevertheless, anybody who runs a company – this includes founders – should know and understand the basics about numbers including company finances. The good news is that you do not need to be a mathematical genius to understand. You only need a basic understanding to visualize the information these figures present to you. But how can you measure the performance of your startup?

Why is it so hard to measure the performance in a startup?

At first we need to state that there is a difference between performance and success. Success, which is not limited to financial success, is the ultimate goal of every company. Performance on the other hand is more or less the current operating result in different areas. This result can be either positive, which means progress for the company, or negative, which means a setback on the way to success. There is a variety of factors affecting success and the performance of each of these factor can be measured.

The performance of companies is generally measured by using key performance indicators (KPIs). There are many standardized KPIs that probably every (major) company takes into consideration. Large companies even try to measure the smallest possible details of their business. For example, shopping malls automatically count the number of visitors per day or hour and supermarkets like Aldi even measure the time that the cashier’s desk is open during a payment transaction.

The problem with newly founded companies is two-fold. First of all, small companies will not have as many data available as one might need. Additionally, in case there is data available, it needs to be analysed with consideration of the startup environment the company is in.

This brings us to the second problem. As mentioned above, most of the times it does not make sense to compare your figure with the “normal range” given in books. As you are dealing with a newly founded company, the understanding of your KPIs needs to be adapted. Keeping these thoughts in mind, we will have to come up with performance indicators that make sense in a startup environment with regard to both, importance and significance.

For whom do you need performance indicators?

The first and most important addressees of any KPI are the founders of a company themselves. Every founder should be able to gain an in-depth insight into his business at any time. Due to this, it is mandatory to “keep it simple and stupid” (KISS principle) even though, of course, this cannot be guaranteed at all times. Also, your managing staff and employees, depending on their fields of responsibility, should be able to gain this insight.

The next group of addressees are capital providers such as banks or investors. Normally, you will not be obliged to prove to all of them the performance indicators, but every investor will ask for insight into your businesses performance on a regular basis. That is why you will need to setup a monthly or weekly performance report for them.

Furthermore, there might be additional stakeholders, such as partners, suppliers etc. You will need to think of presenting performance indicators that meet their requirements.

Want to learn more? Read part 2, giving insights into what performance indicators there are & how you can use them!

 

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