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Entrepreneurs: how to tell if you're burning through too much cash?

How do you know if you're burning too much cash? You need to calculate your Burn Multiple. Let me show you how!

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Calculating your Burn Multiple

To do this, you need to measure the efficiency of the capital you've just raised!

Very few entrepreneurs calculate and track this efficiency ratio. It’s never in the reports I receive.

Today, investors only talk about profitability and cash burn. A year ago, they only talked about growth multiples. Your growth is still essential. But if you burn too much cash relative to your growth, you’ll struggle to raise more funds. You need to validate your cash burn strategy with your board and your investors.

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What strategy should you adopt?

How can you make the capital you've raised more efficient? By starting to calculate your Burn Multiple ratio and improving it year after year.

The Burn Multiple is the ratio of Net Burn / Net New ARR

ARR = Annual Recurring Revenue

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This essentially measures your cash consumption relative to your growth. The higher the Burn Multiple, the more your startup is burning to grow. At the beginning, your startup won't have revenue, so you won't be able to calculate a burn rate. Later on, you should improve this ratio according to the following industry consensus:

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Burn Multiple - Efficiency:

< 1 Excellent

Between 1 and 1.5 Very Good

Between 1.5 and 2 Good

Between 2 and 3 Average

> 3 Poor

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When should you track your Burn Multiple?

You can calculate and track this ratio monthly, quarterly, or annually, depending on your cash pressure. In the seed phase, you might have a Burn Multiple of 3 because you've just started selling. For example, you might burn €3M if you generate €1M in new recurring revenue. After Series A, you should aim for around 2. After Series B, you need to improve your ratio further. Eventually, it should reach 0 to be profitable.

Your ratio also helps measure the cash you need to burn before reaching product-market fit, and helps detect margins that are too low, churn that is too high... and, therefore, a business model that isn't profitable enough.

In times of crisis, the Burn Multiple is a key indicator of your startup's performance... So, grab your calculator and calculate your Burn Multiple.

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Need more advice? We can provide guidance and support, so feel free to contact us !