Financial Terms That Startup Actors Must Pay Attention to

What you need to pay attention to when you jump into the startup world, especially e-commerce, is to clearly understand what it means Revenue, Gross Merchandise Value, Gross Transaction Value and others. This is important so that you can clearly identify the difference and fully understand the relevant metrics for startups. Tips DailySocial this time will describe in full the important points that need to be observed related to financial terms that are commonly used routinely by venture capital, startup actors, and other related parties.

GMV/GTV

Understanding revenue (Revenue) is a term used to indicate the amount of money received by the company. This amount is the gross amount, or often known as sales turnover. It is not true when you, a Founder and CEO of a startup, are still not able to properly sort out what revenue (Revenue) really means and categorize it as all income owned by the company. All platforms used by companies to generate revenue are not included in the revenue category (Revenue). Even if the money comes from your customers, that doesn't mean the revenue belongs to the company.

The correct understanding is when the total sales and transaction volume are through the platform owned by the company or known as Gross Merchandise Value (GMV) or Gross Transaction Value (GTV). Basically it is a collection of money that is spent by the users in a certain time.

A simple example is a business run by Airbnb. GMV earned by Airbnb comes from price booking users, while revenue (Revenue) generated by Airbnb comes from commissions on each transaction.

MRR & ARR

This definition turns out to be a fairly interesting metric and is favored by financial markets because it involves accuracy and inherent nature. A recurring and ever-present revenue is a business model that involves selling someone for an access or product on a regular basis.

Monthly Recurring Revenue (MRR) is the total revenue (Revenue) for one month, while Annual Recurring Revenue (ARR) is the total MRR multiplied by 12. However, it should be noted that not all companies have recurring income, among others. the company gets more “monthly sales”.

A simple example is UBER. Revenue (Revenue) obtained by UBER is not Monthly Recurring Revenue (MRR), because every trip used by users is not every day (recurring). A good company can be built using recurring or non-recurring income. The point is not to immediately determine that your company's monthly income is MRR, unless the business you run is in accordance with that business model.

New, Expansion, Downgrades & Canceled MRR

The following financial definitions are important for those of you who run startups with recurring income. Separate each category based on the appropriate definition. Categorize all MRRs that have been collected based on 4 groups, including New, Expansion, Downgrades & Canceled MRR.

New MRR is the additional MRR of new clients who first use the product you created. Expansion MRR is an additional MRR that comes from regular customers and is usually triggered by application updates, features (upgrades) in your product. Downgrade MRR is the total number of MRR that began to decrease from customers compared to the previous month, the opposite of Expansion MRR. The last one is the Canceled MRR, which is the cancellation of regular customers who stop using your product services within one month.

Contract Value (TCV & ACV)

In general, each transaction has a Total Contract Value (TCV), meaning it is the total amount of money issued by the client for the company within a certain period of time. While Annual Contract value (AVC) is a measure of the total money issued by the client to the company within a period of 12 months, in this case the expected activity of the client is more than 12 months.

The thing to note is that if your company is about to close sales and in the same month has collected TVC, don't be too hasty in categorizing all revenue (Revenue) within one month. Overall Contract Value and money collected is not revenue (Revenue).

Net Revenue & Gross Margin

In order to see how well your business is doing, you don't just have to look at revenue (revenue). Net Revenue & Gross Margin can also be a determinant of the financial health of your company. Net Revenue is the actual money earned after deducting the cost of selling goods from (Gross) Revenue. This activity is usually widely applied in e-commerce, where the value of Net Revenue usually involves reducing costs including discounts and returns.

Gross Margin is an income analysis to calculate total income from the amount of production produced and its adjustment to the price of goods produced per unit minus variable costs or it can also be said to be gross profit. The higher the percentage means the greater the amount of money the company can retain. Activities like this usually occur in software businesses which often experience high Gross Margin of around 70-90%.

E-commerce companies usually experience significantly low Gross Margin, around 20-40%, due to low margins obtained from goods sold.

The conclusion is that for you startups it is important to know the differences. If the business is implemented correctly, you as CEO and Founder of a startup don't need to be bothered with fundraising activities, the key is to get revenue (Revenue).