What the burn multiple measures
The burn multiple tells you how much cash a company burns to add each dollar of net new annual recurring revenue. A burn multiple of 1.6× means the business spent $1.60 of net burn for every $1 of ARR it added in that period.
It is a simple efficiency check that boards and investors use alongside growth rate. Two companies can both add $750,000 of ARR in a quarter. If one burned $600,000 to do it and the other burned $2,000,000, they are very different businesses to fund. The burn multiple puts that difference into one number.
How to calculate the burn multiple
Divide net burn by net new ARR for the same period.
Burn multiple = Net burn ÷ Net new ARR
- Net burn is cash out minus cash in from running the business. If you know your bank balances, it is cash at the start minus cash at the end, with any money raised in the period added back.
- Net new ARR is ARR at the end of the period minus ARR at the start. Built up from its parts, it is new ARR plus expansion, minus churn and contraction.
A worked example for one quarter:
- Net burn: $1,200,000
- New ARR: $600,000
- Expansion ARR: $300,000
- Churned ARR: $100,000
- Contraction ARR: $50,000
- Net new ARR: $600,000 + $300,000 − $100,000 − $50,000 = $750,000
- Burn multiple: $1,200,000 ÷ $750,000 = 1.60×
Use the same period for both numbers. A month, a quarter or a year all work, because the ratio doesn't change when both sides cover the same time.
What is a good burn multiple?
These are commonly used rules of thumb, not hard limits. Stage, market and sales model all change what is realistic, and early companies often run higher while they find what works. A result exactly on a boundary, such as 1.5×, counts in the higher band.
- Under 1×: excellent. Growth costs less than the ARR it adds.
- 1× to 1.5×: great. Efficient enough to keep investing.
- 1.5× to 2×: okay. Growth is costing more than ideal.
- 2× up to 3×: concerning. Expect questions about how it comes down.
- 3× and above: poor. Each $1 of ARR costs $3 or more of cash, which eats runway quickly.
In the example, 1.60× sits in the okay band. To reach a target of 1.5× on the same $750,000 of net new ARR, net burn would need to be $1,125,000, a cut of $75,000. On the same $1,200,000 of burn, net new ARR would need to be $800,000, which is $50,000 more.
When the burn multiple breaks down
The formula only gives a useful answer when you are burning cash and adding ARR.
- Zero or negative net new ARR. If churn and contraction cancel out or outweigh new sales, you are dividing by zero or by a negative number. The multiple isn't defined. Treat it as worse than any score: cash went out and the business didn't grow.
- Negative burn. If cash went up from operations while ARR grew, the multiple comes out at zero or below. That isn't a meaningful score, but it is the best place to be: growth is paying for itself.
- Fundraising in the period. A round or a loan lands in the bank but isn't operating cash. Leave it out of net burn, or the burn will look far smaller than it is.
Common mistakes
- Mixing periods. Annual burn against one quarter of net new ARR makes the multiple four times too high.
- Using gross new ARR. The burn multiple uses net new ARR, after churn and contraction. In the example, gross new ARR of $900,000 would give 1.33×, which flatters the business.
- Counting one-off revenue. Setup fees and services aren't recurring, so they don't belong in ARR.
- Reading one month on its own. Annual prepayments, a large deal or a payroll timing gap can swing a single month. A quarter or the last 12 months gives a steadier view.
How to improve your burn multiple
There are two levers: burn less for the same growth, or grow more for the same burn.
- Cut spend that doesn't produce ARR. Review hiring plans, tools and channels against the pipeline they create.
- Reduce churn and contraction. Every dollar you keep counts towards net new ARR without adding sales cost. In the example, losses of $150,000 are the gap between 1.33× and 1.60×.
- Grow expansion revenue. Upgrades and add-ons from existing customers usually cost less to win than new logos.
- Shorten the path to revenue. Better targeting and qualification bring in more ARR from the same sales and marketing budget.
Related tools
See how many months your cash lasts with the Funding Runway Calculator, measure how much ARR your sales and marketing spend brings in with the SaaS Magic Number Calculator, and check growth and profit together with the Rule of 40 Calculator. To add pipeline without adding headcount, see our cold email outreach service.