Everybody Burns …sometimes

SaaS Metrics #2 : The most important cash burn metric to monitor

Michael Walkinshaw, CEO, TIMIA Capital

SaaS companies are blessed with high gross margins, recurring revenue, and lower product development costs — so less cash is required to get to a stable financial state.

But what is considered a reasonable monthly cash burn to get to cash-flow breakeven and — more importantly — how should you measure it?

Photo by By James Ewinger

There are multiple ways to calculate cash burn and even more ways to interpret it. Our favourite version is Income Statement Cash Burn (ISCB). This is net income +/- non-cash items in the income statement. It specifically excludes changes in working capital items (i.e. increase in accounts receivable) that occur over a month. This gives us the clearest view of how much cash a company is burning.

ISCB% — expressing cash burn as a percentage of revenue — should also be included in your SaaS metrics toolkit. This calculation is easy to perform but can be difficult to understand. An appropriate ISCB% will depends on your rate of growth and size in revenue.

ISCB% ranges

Points to consider

1. If your customer acquisition metrics are not great and you’re not a fast-growing company, you shouldn’t be spending like you are
2. After you get above $5M in revenue, you should be close to zero on an ISCB% *2

Common reasons for high ISCB% rates

1. Gross margin percentage is too low
2. Customer acquisition costs are too high relative to your customer lifetime value
3. Onboarding costs are high
4. Product development is behind schedule relative to sales
5. General and administrative costs are too high

For entrepreneurs, this checklist can help you identify what parts of the business need to be improved if your ISCB% rate is too high. For investors, it acts as a sanity check to compare what a company is telling them to what it is actually delivering. For example, if a company is “investing in growth” without actually delivering the growth, this will become apparent in the ISCB%.

We have now addressed top line revenue metrics and the bottom line cash burn metrics. Next we will address more finely tuned metrics in the middle of the income statement.

1 — At less than $1M in revenue, low growth would be anything less than 100% per year.

2 — Unless you plan to go public on the Nasdaq and you have the metrics to support it.