The YC Founder's Guide to Key Finance Metrics

We’ve helped hundreds of YC startups with their key finance metrics. There's a lot of great content out there about the most important finance metrics for startups (my favorite video on this topic is by YC’s Managing Director of Finance, Kirsty Nathoo.)

However, there are no great dashboards to track this. I wanted to share what the key metrics are are and how to calculate them - and give you a free dashboard. It's important to note that these metrics are all on a Cash Basis — meaning they are based on all of the cash activity for the month, which is, in my opinion, most important for understanding runway. I learned this the hard way, when my last startup ran out of money because we thought we were default alive but were measuring cash metrics on an accrual basis, not cash basis.

To be clear, Accrual based accounting is best for your bookkeeping and financial statements (see YC Founder’s Guide to Bookkeeping here), in addition to that, you can understand your business better by also understanding the cash flow by measuring these metrics on the cash basis.

tl;dr

At minimum, it is helpful to measure these numbers monthly (formulas based on November reporting):

Cash Balance

• the sum of all of your cash across all of your bank accounts at the end of the month
• Cash Balance = (Mercury Checking November 30, 2022 Balance + Mercury Treasury November 30, 2022 Balance + Brex Cash November 30, 2022 Balance)

Burn Rate

• the total amount of cash your company spent during the month
• Burn Rate = (November Cash Balance - October Cash Balance)-(November VC Funding Deposited into your bank accounts)

Average Burn Rate (prior 3 months)

• the average amount of the total amounts of cash your company spent during the prior 3 months.
• Average Burn Rate = (September Burn Rate + October Burn Rate + November Burn Rate) / 3

Runway

• the amount of time until you run out of money
• Runway (months) = (Cash Balance / Average Burn Rate)

Growth Rate

• the percentage change in your company's revenue compared to last month
• Growth Rate = (November revenue - October revenue) / (October revenue)

Compound Monthly Growth Rate

• the average month-over-month growth over a longer-term duration
• CMGR = (November Revenue / First Month Revenue) ^ 1 / (November - First Month) - 1
• November Example with revenue starting in January
• CMGR = (November Revenue / January Revenue) ^ 1/10 - 1

Default Dead or Default Alive

• Default Dead means that if your expenses stay the same, and your growth rate stays the same, you will run out of cash before you are profitable
• Default Alive means that if your expenses stay the same, and your growth rate stays the same, you will have enough cash to get to profitability

🤖 Automatically get these metrics

• Calculating these metrics by hand takes forever. We created a dashboard that automatically calculates most of these metrics for you. If you would like to try the Key Finance Metrics Dashboard by Fondo please email me d@tryfondo.com

Longer version ✍️

Cash Balance

Your cash balance is the sum of all of your cash across all of your bank accounts at the end of the month.

If you are like most startups, you probably have more than 1 bank account, you will want to add up all of your bank accounts each month based on the bank statement month end balance. Do not include credit card balances in this calculation.

^Formula

^{Cash Balance = (Mercury Checking November 30, 2022 Balance + Mercury Treasury November 30, 2022 Balance + Brex Cash November 30, 2022 Balance)}

Burn Rate

Your burn rate is the total amount of cash your company spent during the month. This is the amount of cash you spent on operating and other expenses. Burn rate does not include deposits related to fundraising.

For example, if your company's expenses were $50,000 last month and your revenue was $10,000, and you raised $500,000 last month, your burn rate would be $40,000. The quickest way to calculate this is by finding the difference between your ending balance last month and your ending balance this month, less any funding received.

^Formula

^{Burn Rate = (November Cash Balance - October Cash Balance)-(November VC Funding Deposited into your bank accounts)}

Average Burn Rate (prior 3 months)

Your Average Burn rate is the average amount of the total amounts of cash your company spent during the prior 3 months.

You might calculate your runway based on your average burn rate rather than your current burn rate for a couple of reasons.

First, the average burn rate takes into account your expenses and revenue over a 3 months, rather than just a single month. This can provide a more accurate picture of your financial health and help you better understand how long you have before you run out of cash.

For example, if your expenses and revenue fluctuate from month to month, calculating your runway based on your current burn rate could result in an overly optimistic or pessimistic estimate of your financial situation. By using your average burn rate, you can get a better sense of how much cash you have available to continue operating over the long term.

Second, you might use your average burn rate to calculate your runway because it can help you plan for the future. By understanding how long you have before you need to secure additional funding or become default alive, you can make more informed business decisions, such as investing in new products or markets or scaling back your operations.

Calculating your runway based on your average burn rate can provide a more accurate and useful estimate of your financial situation and help you plan for the future.

^Formula

^{Average Burn Rate = (September Burn Rate + October Burn Rate + November Burn Rate) / 3}

Runway

Runway is the amount of time until you run out of money. It is typically measured in months, and it represents the amount of time you have before you need to secure additional funding or become default alive in order to continue operating.

^Formula

^{Runway (months) = (Cash Balance / Average Burn Rate)}

Growth Rate

Growth rate is the percentage change in your company's revenue compared to last month.

^Formula

^{Growth Rate = (November revenue - October revenue) / (October revenue)}

Compound Monthly Growth Rate (CMGR)

CMGR is the average month-over-month growth over a longer-term duration. Projecting your revenue based on compound monthly growth rate (CMGR) can be a more accurate way to forecast the company's future revenue than using monthly growth rate. At startups, your growth rate may fluctuate a lot month to month. You can have one month of 50% growth, and another of -10% negative growth — we can normalize this with CMGR.

^Formula

^{CMGR = (November Revenue / First Month Revenue) ^ 1 / (November - First Month) - 1}

^{November Example with revenue starting in January:}

^{CMGR = (November Revenue / January Revenue) ^ 1/10 - 1}

Default Dead or Default Alive

Default Dead means that if your expenses stay the same, and your growth rate stays the same, you will run out of cash before you are profitable

Default Alive means that if your expenses stay the same, and your growth rate stays the same, you will have enough cash to get to profitability

🤖 Automatically get these metrics

^{Calculating these metrics by hand takes forever. We created a dashboard that automatically calculates most of these metrics for you. If you would like to try the Key Finance Metrics dashboard by Fondo (FREE) please email me d@tryfondo.com}

Need help?

Try Fondo ⚡

Disclaimer

This blog for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.