When writing a business plan, highlighting the key financial metrics is critical. Without a clear understanding of key financial metrics, it’s challenging to make informed decisions, optimise spending, and plan for growth.

In this blog post, we’ll explore the most important financial metrics to include in a business plan, including what healthy and unhealthy ranges look like, and how to use them to guide your startup toward success.

1. Burn Rate

What it is: The burn rate is the rate at which a startup spends its capital before becoming profitable. It’s crucial to know how quickly you’re using up your cash reserves and how long you can sustain operations without additional funding.

Formula:

Burn rate financial metric business plan

Healthy Range:

  • For early-stage startups, a burn rate that consumes 20-30% of your capital per month is typical as you’re still building and testing your product.
  • For growth-stage startups, a burn rate of 10-20% per month is more manageable if you’re experiencing solid growth.

Unhealthy Range:

  • A burn rate of >50% per month is dangerous, as it could mean your startup will run out of cash too quickly.

Recommendation: A good rule of thumb is to keep your burn rate low enough to extend your runway for 12-18 months before needing additional funding.

2. Runway

What it is: Runway is the amount of time a startup can operate before it runs out of money, given the current burn rate.

Formula:

Runway financial metric business plan

Healthy Range:

  • Ideally, you should have 12-18 months of runway. This gives you enough time to either become profitable or raise another round of funding.

Unhealthy Range:

  • <6 months of runway is a red flag, as it indicates you may be running out of cash quickly, which puts pressure on fundraising or immediate profitability.

Recommendation: Monitor your runway closely, especially when you’re approaching the 6-month mark. If needed, look for ways to reduce costs or raise additional capital.

3. Customer Acquisition Cost (CAC)

What it is: CAC is the total cost of acquiring a new customer, including marketing, advertising, and sales expenses.

Formula:

CAC financial metric business plan

Healthy Range:

  • For most startups, CAC should be 3x or lower than the Customer Lifetime Value (CLTV). This means it costs less to acquire a customer than the revenue you expect to generate from them over time.
  • In the early stages, CAC should not exceed 20-30% of your monthly revenue.

Unhealthy Range:

  • CAC > CLTV is a major problem, as you’re spending more to acquire customers than you’re making from them, which is unsustainable.

Recommendation: To improve your CAC, optimize marketing channels, focus on customer retention, and refine your sales processes.

4. Customer Lifetime Value (CLTV)

What it is: CLTV is the total revenue you expect from a customer over the entire duration of their relationship with your business.

Formula:

CLTV financial metric business plan

Healthy Range:

  • A healthy CLTV should be at least 3x your CAC. A higher CLTV indicates strong customer retention and value over time, particularly important for SaaS and subscription-based businesses.

Unhealthy Range:

  • CLTV < CAC is a major red flag, as it means you are spending too much to acquire customers without generating sufficient revenue from them.

Recommendation: Work on improving retention rates, increasing customer spend through upselling, and enhancing your product or service to keep customers longer.

5. Churn Rate

What it is: Churn rate refers to the percentage of customers who stop using your product or service during a given period.

Formula:

churn rate financial metric business plan

Healthy Range:

  • For SaaS or subscription-based businesses, a monthly churn rate of 2-5% is generally considered healthy.
  • Early-stage businesses may have higher churn as they refine product-market fit, but aiming for low churn is key to long-term success.

Unhealthy Range:

  • A churn rate >10% per month is a serious concern and suggests customer dissatisfaction, which could hinder growth.

Recommendation: Focus on improving customer experience, customer support, and continuously adding value to reduce churn.

6. Monthly Recurring Revenue (MRR) / Annual Recurring Revenue (ARR)

What it is: MRR and ARR are predictable revenue streams generated from subscriptions or contracts, providing insight into business stability.

Formula:

MRR and ARR financial metric business plan

Healthy Range:

  • Positive, consistent growth in MRR/ARR is essential. A growth rate of 10-20% month-over-month is typically considered healthy for SaaS businesses.

Unhealthy Range:

  • Flat or negative MRR could indicate you’re losing customers faster than you’re acquiring them, which could signal issues with product-market fit or retention strategies.

Recommendation: If your MRR/ARR is stagnating, analyze your customer acquisition strategies, product features, and retention efforts.

7. Gross Margin

What it is: Gross margin is the percentage of revenue that remains after accounting for the direct costs of producing goods or services.

Formula:

gross margin financial metric business plan

Healthy Range:

  • 50-70% gross margin is typical for many tech and service-based businesses. Higher margins are ideal, especially in SaaS, where margins can exceed 80%.

Unhealthy Range:

  • <20% gross margin is a concern, as it indicates that production or service delivery costs are too high relative to your revenue.

Recommendation: Improve operational efficiency, reduce production costs, and look for ways to increase pricing or add value to your offering.

8. Net Profit Margin

What it is: Net profit margin measures how much of each dollar of revenue turns into profit after all expenses, taxes, and interest.

Formula:

net profit margin financial metric business plan

Healthy Range:

  • 5-15% net profit margin is common for a growing startup, especially as you’re reinvesting profits into scaling.

Unhealthy Range:

  • Negative net profit margin for extended periods suggests that you may be overspending or not generating enough revenue to cover costs.

Recommendation: Work toward increasing revenue while controlling costs. A path to profitability should be clear, even if it’s not immediate.

9. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

What it is: EBITDA is a measure of operating profitability that excludes non-cash expenses and non-operating costs.

Formula:

EBITDA financial metric business plan

Healthy Range:

  • A positive EBITDA margin of 10-20% is healthy for many startups. If EBITDA is growing, it indicates your core business operations are profitable.

Unhealthy Range:

  • Negative EBITDA over long periods suggests inefficiencies and operational challenges that need to be addressed.

Recommendation: Focus on improving profitability by optimizing operating expenses and finding more efficient ways to generate revenue.

10. Debt-to-Equity Ratio

What it is: This ratio compares the company’s total debt to its equity, indicating the degree of financial leverage.

Formula:

debt to equity ratio metric

Healthy Range:

  • A debt-to-equity ratio of <1.0 is ideal, especially for early-stage startups. It means the company has more equity than debt, which is a sign of financial stability.

Unhealthy Range:

  • >2.0 ratio is risky, as it suggests that the company is relying too heavily on debt to finance operations, which can strain cash flow.

Recommendation: Keep debt levels manageable, especially during the early stages of your business. Consider equity financing over debt to avoid excessive leverage.

11. Working Capital

What it is: Working capital is the difference between a company’s current assets and current liabilities. It measures liquidity and operational efficiency.

Formula:

working capital financial metric

Healthy Range:

  • A current ratio of 1.5-2.0 is ideal, indicating that your business can meet its short-term obligations comfortably.

Unhealthy Range:

  • <1.0 current ratio may suggest liquidity problems, as you may not have enough assets to cover short-term liabilities.

Recommendation: If your working capital is negative, look for ways to improve cash flow, reduce liabilities, or increase assets.

Conclusion

Tracking key financial metrics is essential for creating a viable business plan. By understanding these metrics and keeping them within healthy ranges, you can make informed decisions about where to allocate resources, when to raise capital, and how to scale your business effectively. Regularly reviewing and optimising these metrics will set your startup on a path to profitability and sustainable growth.

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About | My name is Sohrab Vazir. I’m a UK-based entrepreneur and business consultant. At the age of 22, and while I was an international student (graduate), I started my own Property Technology (PropTech) business under the endorsement of Newcastle University. I grew my business to over 30 UK cities, and a team of four, and also obtained my Indefinite Leave to Remain (Settlement) in the UK. Currently, I help other entrepreneurs with their businesses.