If you are getting standard financial statements each month from your bookkeeper or accountant, that is half the battle. However, the income statement (also known as a P&L or Profit and Loss) and the balance sheet don’t give you the full story. From working with many Software companies, we see they get tremendous benefit from reviewing the following 5 metrics:
1. Bookings Growth
Bookings refer to the total contracted revenue signed in a period. For example if you have $1,000 of MRR in a 12 month contract, it represents $12,000 of bookings in the period.
2. Revenue Growth
The business model of most Software companies is based around revenue. In the case of licensed software, the revenue is recognized when the software is delivered and accepted by the customer. For example, you could take 100 orders in a month for 100k but you may only deliver 50 of those licenses so you have bookings of 100k and revenue of 50k.
3. Gross Margin
Gross margin is calculated by taking the revenue and subtracting all the costs of goods sold, which in your software business includes serving and hosting costs, software licenses used, and revenue share agreements in the case of ad networks.
4. Average Selling Pricing
The Average Selling Price of a software company is a metric that is often ignored. CEOs often focus more on metrics such as revenue, total number of deals or number of pipeline opportunities when making high-level decisions. However, knowing your Average Selling Price across the board is a critical aspect of effective sales management. Being able to identify the average size of your deals can provide a wealth of meaningful insights that drives more efficient sales management and C-level decisions.
5. Cash Flow Analysis
It’s important to calculate how much cash your company has generated over a certain time period to analyze your financial strength. Cash flow can be calculated monthly, semi-annually, quarterly and yearly. On the other hand, cash burn rate measures the speed at which cash ends or is burnt in consumption. Depending on the life cycle of your software business, you can determine which metric to use.