The two simple KPIs for scaling businesses

  1. Startup
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    91 18
    7 |

    Jeremy Hunt -- the CFO, not the politician -- is an investor at heart. He is the co-founder of InvestorConnected, an analytics platform for startups and scaleups to help them present their information to investors.

    “Our goal is to help small and scaling businesses grow by providing them with the tools to develop investment ready business plans,” says Hunt. Along with being the co-founder, Hunt’s role as CFO is to keep the InvestorConnected’s growth on track.

    Much like the businesses they work with, the company is itself a startup. It’s not an easy job, but Hunt identifies two metrics he keeps a close eye on. “Everyone agrees that when you launch a new business or product, traction and momentum are key. Especially relevant in this situation, but often overlooked, is Financial Momentum; in particular monthly revenue and cost growth (burn rate).”

    Monthly revenue growth is powerful because it “shows the trend of total revenue generated by the business month-on-month,” Hunt explains. When a company goes through a growth phase, profits are generally reinvested back into the business, meaning the more revenue generated, the faster a business can grow.

    “Revenue growth provides us with a simple and easy to understand metric to predict how fast we can grow our business. Couple this with the cost burn rate and you have something very powerful in predicting how a business is likely to grow – it is something we advise our start-up clients to pay particular attention to.”

    The second KPI Hunt monitors is Trend of Return on Sales (RoS). This measure is more useful for an established but growing business. “RoS is one of the classic investor ratios, which if looked at in isolation will tell you how well a business is turning its revenue into profit.

    “By analysing how this ratio grows or falls as a business grows, we are able to determine if the business is structured to be more profitable the bigger it becomes, and provide indications of how it will perform when scaling up.

    “A well-structured business should maintain or increase its RoS as revenue grows; whereas one that sees a diminishing RoS with revenue growth may indicate future problems ahead if it continues to grow without changing the way it operates.”

    By way of example, Hunt references an analysis he has done of Uber London’s numbers. “The report uncovered some interesting findings, including a RoS of under 7%, coupled with a cost burn rate matching revenue growth.

    “The resulting low profitability is far less than most people expect, and when coupled with a saturating market with increasing external pressures, the implications are that the business will drastically have to alter its business model if it wishes to maintain or improve long term profitability.”

    For business owners who want to scale a KPI’s effectivity is determined by your follow through. “A KPI is only useful if action can be taken off the back of it, and action should be taken when a KPI moves in a certain direction or hits an important threshold.

    “Without understanding the importance of what a KPI is telling you, and therefore the evolution of the business, you face the risk of not being able to take decisive action at the right time.”

    What are some KPIs or metrics you monitor in your business? Comment below!

  2. whobiggs

    whobiggs UKBF Newcomer Free Member

    12 2
    What is a KPI? While you're at it what's a CFO?
    Posted: Mar 10, 2018 By: whobiggs Member since: Jul 29, 2017
    Ian Shorrocks likes this.
  3. npfmedia

    npfmedia UKBF Newcomer Free Member

    11 4
    Key performance indicator
    Co founding officer (I think)
    Posted: Mar 12, 2018 By: npfmedia Member since: Mar 10, 2016
  4. Financial-Modeller

    Financial-Modeller UKBF Enthusiast Full Member

    713 235
    Ever heard of Google?
    Posted: Mar 13, 2018 By: Financial-Modeller Member since: Jul 3, 2012
  5. Financial-Modeller

    Financial-Modeller UKBF Enthusiast Full Member

    713 235
    A good article. Thanks for sharing, Francis.

    I instil the importance and value to my clients of having a few KPIs that are relevant to their business, and produced efficiently and in timely manner.

    Firstly, they can act as an effective early-warning system that attention may be required in a specific part of the business.

    Secondly, it is useful to provide strong KPIs to potential purchasers of a business, as a simple and easily-digested piece of information to substantiate a reasonable valuation.
    Posted: Mar 13, 2018 By: Financial-Modeller Member since: Jul 3, 2012
  6. The Byre

    The Byre UKBF Legend Full Member

    9,975 4,058
    A CFO is Chief Financial Officer, as in CEO - Chief Executive Officer, COO - Chief Operations Officer, CTO - Chief Technology Officer and so on.

    It is a series of company officer title abbreviations that we all agree upon and just help to make life a little simpler. Being a so-called company officer has certain legal implications and these vary with jurisdiction, so whereas the vague word 'Manager' may mean anything from the person who shows people to their seats in a restaurant, through to the absolute boss of a multi-billion dollar international, saying that you are the CFO tells me exactly that in all things financial, the buck stops with you.

    As for the article, I didn't think much of it - too much jargon suggests a lack of understanding of the subject.
    Last edited: Mar 13, 2018
    Posted: Mar 13, 2018 By: The Byre Member since: Aug 13, 2013
    whobiggs likes this.
  7. whobiggs

    whobiggs UKBF Newcomer Free Member

    12 2
    I've heard of it but I'm of an age where it is not an automatic place to go - didn't occur to me.
    Posted: Mar 17, 2018 By: whobiggs Member since: Jul 29, 2017
  8. Rhys Marc Photis

    Rhys Marc Photis UKBF Newcomer Free Member

    0 0
    I fully agree with Jeremy's approach to managing financial performance for businesses under 15-25 employees (although people performance is also important :).

    Thus, I find the title a little bit confusing and I think it should read 'The two simple KPIs for driving startups'.

    A startup which exceeds the 15-25 people naturally changes it's nature and becomes a scaleup. Many organisations like are trying to create an awareness of how the nature of a businesses change at that point. As shown in this animated videoa scaleup has to build a real organisation and therefore financial performance management isn't enough anymore.

    We like using the Balanced Scorecard logic. As a rule of thumb, look at measuring 4 essential areas when scaling your business:
    1. Finances: Start with revenue, growth rate, RoS and then build on these KPIs
    2. Customers: Start with measurable customer experience
    3. Organisation: Create KPIs while defining processes (e.g. steps, timeline, accuracy)
    4. People: Start with clear goal-setting, getting/receiving feedback, 1-2-1 meetings.

    What brought you to becoming a successful startup will not necessarily make you a successful scaleup.
    Posted: Mar 21, 2018 By: Rhys Marc Photis Member since: Mar 21, 2018