Burn Multiple: What Is It, Why It’s Important and How To Calculate It

What is Burn Multiple?

The burn multiple is a financial metric that compares a company's net burn rate to its net new ARR (Annual Recurring Revenue). This reflects the spending efficiency of a company's growth.

Understanding Burn Multiple

The burn multiple operates within the intricate nexus of financial efficiency metrics. This collection of metrics includes the likes of the LTV/CAC ratio, ARR, CAC and more.

The burn multiple offers a unique perspective, serving as a barometer for a company's growth strategy. It explores how well a company uses its money to make new, regular income. This is crucial for SaaS companies and is a key SaaS metric.

With this metric, spending efficiency comes into sharp focus. A lower burn multiple signifies growth achieved with minimal capital burn, indicating fiscal health. It's not just a snapshot of the present, but a forecast of a company's financial trajectory.

By offering a glimpse into the inner workings of a company's financial engine, the burn multiple emerges as an indispensable tool for strategic decision-making.

Burn Multiple Formula and How To Calculate

Calculating the burn multiple is straightforward. The formula is:

Burn Multiple = Net Burn / Net New ARR

To illustrate, let's take an example. Suppose a company has a net burn of $1 million per month and a net new ARR of $3 million per month. The burn multiple in this case would be 0.33 ($1 million / $3 million).

Importance Of The Burn Multiple

The burn multiple is of high importance to businesses due to the following reasons:

Business Growth Validation

The burn multiple acts as a check on a company's growth strategy. A lower burn multiple indicates efficient growth and good financial health.

Attracting Investors

Investors closely look at burn multiple when considering investment opportunities. A lower burn multiple is often more attractive to investors.

Financial Control

The metric helps maintain financial control by identifying inefficient spending and enabling strategic cost reduction.

Long-term Sustainability

A lower burn multiple signifies that a company can maintain its operations longer with existing capital, thereby increasing sustainability.

How To Improve Your Burn Multiple

Improving burn multiple entails making an organization more efficient. There are various different activities organizations can do to improve their performance. Here are a few methods for improving your burn multiple:

Regular Rolling Forecasting

This technique allows for continuous plan updates, increasing efficiency and financial control. You can get started with our free rolling forecast template.

Lowering CAC

By reducing the Customer Acquisition Cost (CAC), a company can improve its spending efficiency.

Planning For Different Scenarios

Having contingency plans for potential scenarios enhances a company's ability to adapt, increasing efficiency.

Conducting Profitability Analysis to Improve Gross Margins

A profitability analysis enables organizations to identify where operations can be optimized. One of the goals of this would be to increase gross margins, which will in turn help a company become more efficient.

Efficient Workforce Planning

Ensuring the workforce is well-organized through effective headcount planning can also help improve the burn multiple.

Factors Affecting Burn Multiple

Several factors influence a company's burn multiple:

Business Maturity

A seed-stage company usually has a higher burn multiple as they start selling, which may decrease as they reach Series A or B rounds, improve efficiency, and begin operating at scale.

Market Conditions

Fluctuating market conditions can impact a company's burn multiple. An unfavorable market might lead to higher burn multiples.

Operational Efficiency

The efficiency of a company's operations can directly affect the burn multiple. More efficient operations often correlate with lower burn multiples.

Competitive Environment

A highly competitive environment might necessitate increased spending, leading to a higher burn multiple.