How quickly is your business burning?
Does that question give you heartburn? No pun intended…ok, well maybe! 😉
It should. Are you familiar with your business's burn rate?
A business burn rate describes the rate at which a company is spending its overhead before generating positive cash flow from operations. Said differently, it measures your negative cash flow and is measured as a monthly rate. If a business is 'burning' quickly, the rate is calculated in weeks or days.
Burn rates can, and will, be different with every company. One company might have a burn rate of $100,000, and another might have a burn rate of $2 million. Do not get caught up on the actual number and assume that the higher the number, the quicker the company will 'burn.' The dollar amount associated with the burn rate is your flat overhead for the year.
Companies can use their burn rate to measure the amount of time the company has before they run out of money. Let us look at an example:
Suzie's Sub Station has $250,000 in the bank.
Suzie's Sub Station's monthly expenses are $10,000.
Suzie’s Sub Station’s annual expenses are ($10,000 * 12 months) = $120,000
The monthly Burn Rate is $10,000.
How long could Suzie's Sub Station survive with no additional income? We like to call this the businesses' runway'. $250,000 / $10,000 = 25 months
While working with your bookkeeper or accountant, be sure to ask what the gross burn and net burn rate is for your company. The burn rate should not only be considered and reviewed for startup companies. Mature companies should check this number in the case of any unforeseen circumstances, or should we say a global pandemic in our case.
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