Burn Multiple vs SaaS Magic Number

Published by 4NLab · Updated · Our methods

Burn multiple measures company cash efficiency relative to ARR growth. Magic Number measures revenue growth relative to prior-quarter sales and marketing expense. A company can look efficient on one and weak on the other because the numerators, spending scopes, and timing differ.

Key differences

QuestionBurn MultipleSaaS Magic Number
Which spending scope?Net cash consumed by the business over the period.Sales and marketing expense in the prior quarter.
Which growth measure?Net increase in ARR during that same period.Change in recognized quarterly revenue, multiplied by four.
Which direction is favorable?Lower, when both burn and ARR growth are positive.Higher, within a consistent revenue and expense definition.

One scenario, two measures

Hypothetical worked scenario

A fictional company burns $450,000 in Q2 and adds $300,000 net new ARR. Quarterly revenue rises from $500,000 to $575,000; Q1 sales and marketing expense was $400,000.

Burn multiple = $450,000 ÷ $300,000 = 1.5×. Magic Number = (($575,000 − $500,000) × 4) ÷ $400,000 = 0.75×.

Doubling non-sales spending can worsen burn multiple without directly changing the Magic Number denominator. A change in annual customer prepayments can also affect cash burn while recognized revenue follows its service schedule.

Which should you use?

  • Use burn multiple with runway to investigate the overall cash cost of growth, including delivery costs and overhead.
  • Use Magic Number to investigate the relationship between sales spending and subsequent recognized revenue growth. Confirm that the assumed quarter lag is useful for your sales cycle.
  • If the two diverge, reconcile the cash flow bridge and expense categories before choosing an operational response. A single efficiency label obscures the reason for the divergence.

Where comparisons can mislead

  • Do not use net new ARR as the numerator in this site’s Magic Number formula; that is a related ARR-based sales efficiency measure.
  • Neither ratio adjusts automatically for customer concentration or the quality of growth.

Explore the full guides: Burn Multiple and SaaS Magic Number.

Sources and methodology

The references below explain the underlying methods. Our worked scenarios use hypothetical figures; they are not company results or current market benchmarks.

Found an error or a definition that differs from your reporting? Send a correction with the page URL and the method you use.