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Leading Indicators is a CFO Brew series on important or interesting KPIs. Is there a unique KPI in your industry you’d like us to know about? Get in touch with us at [email protected].
There’s been a lot of talk recently here at CFO Brew about profitable growth. We recently spoke with CFOs of two tech companies who have helped shift the mindset from “growth at all costs” to balancing growth with judicious capital spending.
In addition to discussing company strategy, these CFOs also shared the metrics they monitored to help them move toward and/or maintain profitable growth.
Monitoring margins. Larry Roseman, CFO of Thumbtack, an app that connects customers with home services from contractors to landscapers, told us the company had “double digit EBITDA margins” and positive free cash flow last year.
Roseman listed a number of indicators he follows to ensure Thumbtack remains on track for profitable growth. One of them is contribution margin, which is the difference between total revenue and variable costs. Roseman described variable costs as “things that you have to spend to get revenue.”
“That’s a margin that I pay attention to, because ultimately that’s where you’re going to see whether you’re growing profitably,” he said. “Maintaining a healthy contribution margin is key for a business like ours that is acquiring customers.”
Roseman said Thumbtack pays attention to payback periods on its marketing spending to help control costs and maintain a healthy contribution margin.
“One of the things that I’m proud of about our business is we think about marketing spend, regardless of what channel it’s in…on a performance basis,” Roseman explained. “We don’t have some bucket of marketing spend that we just spend and expect nothing from. We look at our marketing spend as a sort of portfolio. Now, obviously certain channels have better returns than others, but we expect to get a payback at a reasonable hurdle rate [the lowest acceptable rate of return] on all of our blended marketing spend.”
Feel the burn (less and less). Another way for startups to track their progress toward profitability is by monitoring how quickly they’re spending cash. Therefore, companies like expense platform Brex monitor their burn rate.
When Brex revamped its operations early last year, company leaders wanted to reach the point where they didn’t have to necessarily raise more capital to keep growing, according to Ben Gammell, president and CFO.
“Years ago, when Brex was burning more capital, if we remained on that trajectory and that hadn’t changed, then we would probably find ourselves in a position whereby we would need to raise additional funds to then be a growing enterprise,” he told us.
Since the reset, Brex’s burn rate is down about 80%, Gammell revealed.
“By virtue of burning very small amounts of capital at this point in time, and still with a lot of capital on the balance sheet, it means we can be a lot more opportunistic about how we deploy that capital,” he said.