Why it’s important to understand and differentiate Revenue, Profits and Risk for a startup

By May 18, 2019 No Comments

Although it sounds fairly straightforward, often in the fast pace environment, startups forget the definitive metrics that can make or break their company. Not only that, these metrics are often poorly assigned to the right people to take care of, where one goal is taken up by multiple leaders where the other is completely ignored.

Here’s a simple way to start thinking about Revenue, Profits, and Risk for your startup:

What is Revenue?

Revenue is what tells you how badly you are selling or marketing your product or services. It’s outward facing and is led by the VP of Sales. They need to predict sales targets and compare it with last quarter’s metric. The VP of Sales also look at it by region, product, and new & repeat customers. They are responsible for building sales funnels and understand where potential customers are in their step by step process in moving towards making a purchase. On the other hand, the VP of Marketing looks after how users are informed about the product. How certain campaigns are doing in terms or reach and engagement. In simple ways, anything that has to do with Sales, it’s part of the revenue metric.

What is Profitability?

Profitability metric is how efficient the processes of the company is where it creates and delivers the product or services to customers. These are operational metrics. Operational metrics are usually taken care of by the people responsible for production. Profitability is usually led by the Head of Operations or the COO. This involves reducing the wastage of resources, ensuring that supply meets demands so that there is no loss. Profitability is all about efficiency.

What is Risk Metric?

Risk metrics are often looked after by Risk Manager or Creditors. They are supposed to predict any potential damage to the business. Risk metrics involve things like the burn rate, churn rate in case of subscription-based business models and the potential risk caused by these. Risk Manager’s job is to mitigate these risks. Another kind of Risk Metric is for Banks and NBFCs where they need to measure their current exposure they have to potential defaults at any time and what percentage of those are expected to default in the next 6 months. Risk metric is highly related to the debt of your startup.

To sum it up, a great startup will harness all these three metrics in order to sustain in the market. Of course, at different scenarios, the weight/focus on the metrics will differ, however, they can not be completely ignored.

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