WTF: Burn Rate

A burning hundred-dollar bill with flames rising against a pink background.

The other day, yet another client asked me if I have a burn-rate calculator. Burn rate seems to be this mythical thing, but there’s nothing really magical about it. It’s how quickly a company is spending its cash to cover costs and it’s usually expressed as how many months you have left until you run out of money. 

There you go. People over-complicate it. If somebody gives you $12,000, and your burn rate is $1,000 a month, you have enough cash to last 12 months.

In other words, burn rate tells you how quickly your business ‘burns through’ capital, typically in start-ups. However, all businesses — regardless of their stage in the business life cycle — can benefit from knowing their burn rates.

Why does that matter? Because if you don’t know what your burn rate is, you won’t know how long you have until you’re going to run out of cash. And using our earlier example, if you calculate your burn rate at $1,000, but it’s really $2000, then you’re going to need more cash in six months vs. twelve, and that’s a very different timeline for raising additional funds for your business. 

So calculating your burn rate is very important. You need to know how much money you NEED to spend every month to keep your doors open. That means everything: rent, payroll, coffee, insurance, toilet paper. Everything. Then divide that by how much cash you have. Voila! You have your burn rate. 

The best way to extend your cash and reduce your burn rate is to… you guessed it, spend less! Don’t get caught up spending money on things you don’t need just because you think you should. Figure out what’s a need and what’s a want, and cut from the wants. That’s how you decrease your burn rate. If you want help complicating your burn rate, buy all means, invest in some of the crazy tools I’ve seen online,  but if you want help simplifying your burn rate, call me.

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