Wednesday 10 November 2010

KPIs reporting

Key performance indicators are the startup's dashboard, they are your compass and life saving data pointers. Without them, you're flying blind. Needless to say, setting them up correctly is one of the most important thing you can do. And equally important, you should use the same KPI's that you show to your board. Otherwise the whole discussion looses meaning.

There are different ways of doing it, however here are some rules of thumb:
- limit number of KIPs to 10 or less
- they should natural, and straightforward, if you have hard time explaining them, find new ones
- cover the vital areas of your business, like financial, operations...

One KPI that you will almost certainly on the financial side have is the burn rate. It's the amount of money you burn per month. It's pretty self explanatory. There are really just two ways how to optimise it: spend less or earn more. Unless you have a really good one, there is really no big need to add another KPI from the financial side. From this one and cash in the bank it's pretty easy to calculate your runway and others.

On the sales,  the imagination can run wild. Sales, sales/client, number of deals (if you have standardised ones), recurring clients, all those are good ones, depending what kind of business you're in. Pick one, two or three that really accurately  embody sales side of your business.

From that point on, areas can be very different. If you're in online retailing, gross margin might be it, if you're building destination site, number of users. If you're in freemium business, conversion rate might be most appropriate. If you're building large data sets amd that brings you value, a number from that side might be appropriate.

There are a number of areas that might be appropriate for your business. Think it through and make the best set of KPIs you can.

When you're finished, take a step back and look at the big picture. Are they accurately portraying your business? Is the impact of each significant long term. When each of them declines, remains stagnant or declines, what do they tell you?

If that all makes sense, bring them to your next board, agree on them with your board. If everybody agrees burn them in and keep them for at least six months, to see the trends. If you can simulate them for the past, even better. Now you have your flying dashboard.

The only thing you need to ensure now that they actually get populated without you having to spend two days each month compiling them.

And that's it, that's one slide on your board deck that you should never be without.  

Thursday 4 November 2010

Board reporting on marketing

Unless you're playing in a really niche space, you need some sort of marketing. Marketing in a startup, like everywhere else, is a fairly straightforward exercise, with two distinctive focus areas.

In strategic marketing you think about positioning and target audience. What kind of product or service you want to produce on long term? What is your target audience, how big is the market. What do you need to do to address it. Those questions will influence your product and operational decision.

In operational marketing you think about ways to achieve what you set out to do. Branding, web site, PR are just one of the  tools with which you execute your decisions. 

So how far do you have to go in reporting to your board? That depends on what kind of board you have, however there are some general guidelines. I recommend that you set and revisit your marekting strategy every quarter, do the analysis and challange your assumptions from the previous cycle. Have the assumptions change? If so, what kind of conclusions do you need to draw, does that change your strategy? You can do that on a fairly condense report and share it with your board. Board will look forward for your recommendations and ask a few questions, but bottom line is: should we stay on course, intensify it or change direction?How much will that cost us in terms of money, time and resources.

On operational marketing  your should concentrate on particular campaigns and projects that you set out to do in order to fullfil your marketing strategy. Usually there is enough news on the topic to address it on every board meeting. So put top two or three projects on one slide.

I suggest that you look at everything in marketing as a project and that you measure as much as you can. Examples are: home page, conference presence, rebranding and new version launch. For each such project you need to understand: scope, timeline, needed resources and expected autcome. It's highly likely, that you can list those on one slide, each month, which give's you a nice overview of what's going on marketing.

Tuesday 2 November 2010

Financial reporting for startups

There are really just a few key and important data points for the board of directors in terms of financial reporting.

On a simplified level investors are interested in:
- how much money you burn
- runway, which tells you how long can you sustain the current and projected  burn rate
- cash in the bank

Investors are worried that you don't run out of money before they can decide that your business is worth financing further. It's natural, they  really like to be on top of their investment. 

There are  4 spreadsheets that fully encompass your business. 

Profit and loss statement is the classical one. It's not the purpose of this blog post to explain it, if you don't know it, google it. But you need to have one ready for your investors each month. The good side of it is that it's usually prepared by your accountants, so you really don't have to bother with it too much. But you still need to understand it.

Balance Sheet is the second classical financial statement. Often it gets produced together with PL and you should  just staple them together PL and send it out. It won't get looked as much, since it doesn't reflect short term performance a lot, it's importance is in a long term.

Budget slide is one of the most important documents. It's basically a table for each month, where draw  your limits of operation. A simplified one breaks down costs into 10-20 categories and forecasts them for next 12 months. It gets looked at a lot, particularly with picky investors. More accurately, the promises and actual performance gets compared a lot. I don't want to go into details, but I was at a board meeting when investors raised an issue with one category that got over budget by 3% in one month. Makes no sense, but it happens. 

Cash flow statement is in my view one of the most useful statements in the world. It's a corporate take on a pocket economy. It shows you exactly how you spent your money, you see how much money came in and how much went out and how. They often don't get produced since an accountant needs to  put a bit of effort in and often needs the management for some explanations. But I think it's absolutely worth it. Particularly in a startup environment where cash is king. If you're not familiar with it, check out wikipedia

Finance guys will often come up with another one, the ratios. There are whole bunch of ratios out there that are standard in a financial community, however I don't believe it makes a lot of sense to use them in a startup. If you really need one, put it into KPIs, don't produce a separate statement for them.

So what to put on a deck in term of financial reporting. Here is my take:
- one spreadsheet where actual numbers against the budget are shown
- simplified cash flow statement (I think you can put everything into at most 10 categories, so you should easily get it onto one slide)
- one slide with burn rate, runway, revenue, cash balance on the bank

The Profit&Loss and Balance Sheet should also be produced and part of the deck, but only as an addendum and not as part of the main presentation.