A list of finance terms you should know.
Average Revenue Per User (ARPU)
The average revenue per user (ARPU) is how much revenue a customer brings to a business over a set period of time. It is distinct from how much cash they pay which may include VAT or other sales taxes and may be upfront or staggered over a larger period than the period of revenue.
For example, if we have 50 users being charged £30 per month and 25 users being charged £60 per month, we would say our average revenue per user per month is: (50 x £30) + (25 x £60) / 75 = £40.
In a recurring revenue business, churn is the number of customers who cancel their subscription divided by the number of customers who were available to renew at the beginning of the period.
Churn is normally expressed as a percentage and, depending on the nature of the business may refer to monthly, quarterly or annual churn.
For example, if the business acquired 50 customers in January and in February 10 of them churned, then we would say churn is 10/50 = 20%.
Customer Acquisition Cost (CAC)
Customer acquisition costs, or CAC is the amount of money spent to acquire one customer.
In some cases this may just be direct marketing costs only (thin CAC), and in others it may include all sales and marketing costs (fully loaded CAC).
The easiest way to think about this is:
If the business spends $1,000 and brings on 50 customers, then each customer costs $1,000 / 50 customers = $20, to acquire.
Whilst customer lifetime isn't always tracked, it is an important concept to understand as it drives other metrics. Customer lifetime is the number of months, or years that a user remains a customer of the product.
This may be manually calculated by checking on average how long a user remains a paying customer or could be derived from our churn numbers.
For example, if churn is 20% per month, then it follows that every month the business is losing ⅕ of its customers from the opening cohort,
After 5 months it would have churned the full cohort. Lifetime can therefore be derived as 1 / churn% which in this case is 1/20% = 5 months.
Lifetime Value (LTV)
Lifetime value (often referred to as customer lifetime value - CLV or LTV) is the value that a customer accrues to a business over the period of time that they remain customers.
Within Projected, we consider Gross Profit to be a proxy for value.
Lifetime value is therefore: value x lifetime in months which can also be calculated as value x 1/churn = value / churn.
So if a business makes £100 revenue and has £30 direct costs per customer, each customer creates £70 of value.
If churn is 10%, LTV = £70 / 10% = £700
The lifetime value to customer acquisition cost ratio shows the amount of value that a customer provides for every £ or $ it costs to acquire them.
It is a good way to gauge how efficiently the business is able to create value from customers. The higher the ratio is, the better.
For example, if the ratio is 10:1 it means each customer contributes £10 for every £1 spent on acquiring them, however, if it is 1.5:1 that means it’s only generating £1.50 for every £1 spent on acquiring them and suggests that the business may struggle if there is a small increase in CAC or a small decrease in value accrued.
Cash flow is the amount of money that is actually generated or spent by a business.
Unlike the P&L which relies on accounting smoke and mirrors, cash flow is a real number and ties in to what has gone through the bank account.
A note on Burn: When startups and investors talk about burn, they are talking about the net cash spent on a monthly basis.
If you are a loss-making startup, this is a good way of understanding your runway.
Runway is the number of months the business can continue to operate based on current levels of burn and cash in the bank.
For example, if a company has £400,000 in the bank and on average bills out £20,000 to customers whilst spending £40,000 on operational costs we would calculate runway as £400,000 / (£40,000 - £20,000) = 20 months.
Monthly Recurring Revenue (MRR)
Monthly Recurring Revenue is a number tracked specifically by SaaS or subscription businesses. Other types of business shouldn't really talk about MRR as their revenue is not likely to be 'recurring'.
It is the amount of revenue that is predictably renewable month on month from all customers.
Lots more to come!
This list will grow and evolve over time. Let us know what else you would like to see here. just drop the Projected team an email firstname.lastname@example.org