With the markets returning to focus on cash flows and demonstrating a path to profitability, valuations are no longer linked to growth at all costs. If the past recipe for a premium valuation was three parts growth, one part profitability, the recipe seems to have shifted to two parts growth, two parts profitability.
Let’s cover three ways to manage your cash burn.
- Cash Runway: The number of months you have until cash runs out
- The Rule of 40%: Some investors validate a “good” balance between growth and profitability by checking if revenue growth rate plus profit (or loss) rate exceeds 40%.
- Burn Multiple: Looks at how much cash you are burning in order to generate each incremental dollar of revenue
We’ll break down each so you can do the back-of-the-napkin math on your own operation.
Click to learn three ways to gauge your cash burn.