5 Financial Metrics Every CEO Should Track

If you do a Google search on financial metrics or KPIs that are most important for your business, you’ll come up with dozens of “must-track” metrics. But are all metrics created equally? Of course not! As a fractional CFO, I’ve helped countless businesses choose the best metrics for their business’ objectives and pain points. 

In this article, we’ll look at the top 5 financial metrics every CEO should track, and they include: 

• Growth metrics
• Profitability metrics
• People metrics

KPI #1: Revenue Growth 

Growth will always be number one. Why? If you aren’t growing, you’re dying. Of course, growth isn’t the only metric that matters, but it is the lifeblood of your business. It directly measures how well your company is expanding its market presence and increasing its sales. It shows how well your marketing efforts and business strategies are working and is a sign that you’re on the right (or wrong!) path. 

Revenue growth measures the increase in sales over a specific period and pours fuel into all your other metrics, giving everything a boost. If you’re a hyper-growth tech business, you want to aim for an annual growth rate of 100% or more. For more mature companies, 20-30% annually could be considered strong. 

How to Measure Revenue Growth: 

Revenue Growth Rate = (Current Period Revenue - Previous Period Revenue/Previous Period Revenue) x 100

Calculate revenue growth by:

1. Subtracting the previous period's revenue from your current period's revenue. 
2. Then, divide that amount by the previous period's revenue. 
3. Take that sum and multiply it by 100 to get your percentage. 

You can do this by quarter, year, or any period you like by subtracting the initial period from the current period, dividing that answer by the revenue of the initial period, and multiplying that amount by 100. 

For example, if your company’s revenue was $2 million in Q1 and $2.4 million in Q2, your revenue growth rate is 20%. 

(2,400,000-2,000,000/2,000,000)x100 = 20%

What Your Team Should Focus On To Grow Revenue 

1. Customer Acquisition. To grow your business, you must bring on new customers. 
2. Customer Retention. Happy customers stick around, so invest in strategies solely focused on customer happiness. 
3. Product Development. Multi-product companies have more opportunities to make more money. 
4. Market Expansion. Explore new markets and geographic regions to expand your customer base. This could be domestic or international. 
5. Pricing. Experiment and iterate on your pricing strategies frequently to figure out what works best and to reflect the value you provide customers. 
6. Sales efficiency. Make your sales team as effective as possible so they’ll close deals faster and increase revenue. 

Tracking revenue growth provides you with critical insights into your company’s performance. By focusing on bringing in new customers, making your current customers happy, product development, expanding into new areas, pricing, and sales efficiency, your team can drive revenue growth and help your company succeed long-term. 

KPI #2: Gross Margins

Gross margins are another key financial metric to keep track of. They give you a clear picture of your company’s financial health and operational efficiency. They show how well you’re managing resources, and optimizing this metric can lead to higher profit margins and better cash flow. 

Gross margins measure the percentage of revenue that exceeds the cost of goods sold (COGS) and indicate whether you have money to reinvest in the business after you’ve covered your direct costs. 

How to Measure Gross Margin

Gross Margin = (Total Revenue - COGS/Total Revenue) x 100

To calculate gross margin, subtract COGS from your total revenue, divide that by the total revenue, and multiply the answer by 100. 

For example, if your company’s total revenue is $5 million and COGS is $1.5 million, the gross margin is 70%. 

(5,000,000-1,500,000/5,000,000)x100 = 70%

That means that 70% of your revenue remains after covering direct costs. 

What Your Team Should Focus On to Grow Gross Margins

1. Cost Management. Negotiate better terms with suppliers, optimize processes, and minimize waste. 
2. Pricing. Again, you can evaluate and adjust pricing to ensure you’re pricing based on perceived value to the customer. 
3. Product experimentation. Going multi-product or assessing your current offerings allows you to promote higher-margin items. 
4. Automate. Leverage AI and automation to streamline your processes as much as possible. 

Your team can ensure your business stays competitive and profitable by improving gross margins. 

KPI #3: Burn Rate

You probably hear a lot about burn rate and burn multiples. Why do they matter? In the fast-paced world of startups and hyper-growth companies, they provide valuable insights. 

Burn rate measures how quickly you're spending cash reserves. It’s an important metric to understand your cash flow and runway. Tracking your burn rate ensures you aren’t depleting your resources too quickly to survive. 

Burn multiple takes it further and evaluates how efficiently you use cash to generate revenue. If that's your business model, it measures the amount of money burned to create one dollar of annual recurring revenue (ARR). This number is more attractive if you’re raising or have already raised money from investors. 

How to Measure Your Burn Rate and Burn Multiple

Gross Burn Rate = Total Monthly Operating Expenses 

Net Burn Rate = Total Monthly Operating Expenses - Monthly Revenue

Burn Multiple = Net Burn/Net New ARR

For example, if your net burn is $30,000 per month and your net new ARR is $10,000, your burn multiple is 3. This means you’re spending $3 to generate $1 of ARR. Or, if you burned $500,000 and added $1,000,000 in ARR, your burn multiple is .5x. A healthy burn multiple is .5x, but 1 to 1.5x means your company is close to breaking even. 

Companies with significant venture capital use burn multiples to show problems within the company, like low gross margins or poor sales efficiency. A lower burn indicates better efficiency and a higher likelihood of product market fit. 

What Your Team Should Focus On to Improve Burn Rate and Multiples

1. Cost Management. We’re in a world where growth and efficiency matter. Identify and reduce unnecessary expenses to reduce this number. 
2. Revenue Growth. Optimize metric #1 without increasing expenses, and you’ll organically improve your burn rate along the way. 
3. Customer Acquisition Costs. Experiment with strategies to lower the cost of acquiring customers. 
4. Operational Efficiency. You see the theme here. Efficiency is the name of the game when it comes to cutting costs. Streamline your operations and watch that burn rate go down. 
5. Product Market Fit. If you have great product market fit, you increase the likelihood of more sales and lower churn, improving both metrics. 
6. Scenario Planning. Have a fractional CFO or finance expert regularly conduct scenario planning so you understand the impact of different strategies on your burn rate and runway. 

By understanding and optimizing these metrics, you help improve investor confidence and the long-term well-being of your business. By lowering your burn, you can drive growth and profitability. 

KPI #4: NRR and Churn

Like burn rate and burn multiple, Net Revenue Retention and churn can go hand-in-hand, depending on your business model. If you have recurring revenue, NRR works, and if you don’t, churn is a great metric that provides deep insights into customer behavior and the health of your revenue streams. 

NRR measures the percentage of recurring revenue retained from existing customers over a period of time, including upsells, cross-sells, and downgrades. But it excludes new customer revenue. 

Churn measures the percentage of customers who stop doing business with you and is a powerful indicator of your customer success strategies. High churn rates can signal product, service, or customer experience issues. 

Both of these metrics have to do with customer success and customer happiness. We all want happy customers because it builds brand loyalty and virality. 

How to Measure NRR and Churn

NRR = (Revenue at End of Period - Churned Revenue + Expansion Revenue/Revenue at Start of Period) x 100

Churn = Customers Lost at End of Period/Customers at Start of Period) x 100

NRR is calculated by taking the total revenue from existing customers at the end of a period, including upsells and cross-sells. Dividing that number by the total revenue from those same customers at the beginning of the period and multiplying the answer by 100. 

For example, if you start with $1 million in revenue from existing customers, lose $100,000 due to churn, and gain $200,000 from upsells, your NRR is 110%. 

(1,000,000-100,000+200,000/1,000,000) x 100 = 110%

Your churn rate is calculated by dividing the number of customers lost during a period by the number of customers at the start and then multiplying that by 100. 

For example, if you start with 1,000 customers and lose 50 during the quarter, your churn rate is 5%. 

(50/1000) x 100 = 5%

What Your Team Should Focus On to Improve NRR and Churn

1. Customer Success. If you don’t have a dedicated customer success team, you should invest in one. These people shouldn’t be tied to revenue goals and, instead, focused solely on making customers happy. 
2. Customer Feedback. Constantly be gathering customer feedback to help improve your product, onboarding processes, and communication. 
3. Engagement and Training. Ensure a smooth onboarding process with ongoing training to help customers get the most out of your product, and regularly engage with them to stay top of mind. 
4. Use Data. Use your data to identify patterns in customer behavior to predict trends and remedy problems. 

Tracking NRR and churn provides insights into customer satisfaction, revenue stability, and growth potential. High NRR and low churn rates signal a healthy, thriving company and provide a solid base for future growth. 

KPI #5: Cash Flow and Profit

Cash flow measures the inflow and outflow of cash and helps you understand your company’s liquidity and ability to meet short-term obligations. Positive cash flow ensures you can cover expenses, invest in growth opportunities, and weather financial challenges that come up for most growing businesses at one time or another. 

Profit, however, measures how much profit you’re making after all expenses have been deducted from revenue. It shows your overall financial performance and the long-term viability of your company if you stay on your current path. 

How to Measure Cash Flow and Profit

Operating Cash Flow = Net Income + Non-Cash Expenses - Changes in Working Capital

Net Profit = Total Revenue - Total Expenses

Cash flow is calculated by adjusting your net income for non-cash items and changes in working capital. For example, if your net income is $500,000, non-cash expenses are $100,000, and changes in working capital are -$50,000, your operating cash flow is $650,000. 

500,000+100,000-(-50,000) = $650,000

For net profit, if your total revenue is $1,000,000, COGS is $400,000, operating expenses are $300,000, and taxes and interest are $50,000, your net profits are $250,000. 

What Your Team Should Focus On to Improve Cash Flow and Profit

1. Cost Management. Keep an eye on unnecessary expenses if you want to improve these numbers. 
2. Revenue Growth. Find ways to increase revenue! 
3. Streamline Operations. By automating and streamlining operations, you can reduce costs and improve efficiency. 
4. Cash Flow Management. Monitor and manage your cash flow closely. 
5. Optimize Profit Margins. Analyze your profit margins and find areas for improvement. 
6. Invest in Growth. Growth is still number one, and it solves a lot of problems when you combine it with strategies that drive efficiency. 

You don’t want to track a million different metrics as a CEO or founder. Instead, pick 3-5 that are important to your current business objectives and problems. By understanding and doing an honest assessment of each, you can make better-informed decisions, drive growth and profitability, and ensure the long-term success of your company.