I know, your first impression of this article is that it’s about candles. How long they burn, at what speed and which is the best type of candle for your professional environment and corporate culture. I’m sorry to inform the candle connoisseurs reading this but this article is in fact about capital, otherwise known as cashola, moola or cash. Burn rate is a term used for negative cash flow, or the expenditure of shareholder capital…man, I kinda want to write about that candle thing now. This can also apply to personal finances too, specifically to disposable or “discretionary” income. Sure, you have to spend money to make money, but there’s a bit more to that phrase.
So, without further ado, here’s how to calculate your burn rate.
1. One More Application
The term burn rate can also be used when referring to project management, the rate at which labor hours are being used in accordance to the efficiency being lost. In basics, it’s the rate at which the project’s budget is being exhausted.
2. Why Should I Care
Well, this is a two prong answer; first prong is that if you have your own start-up you need to know how long you have to develop your product or service before you run out of money. The second prong and arguably sharper one is if you work for a start-up it’s nice to know the approximate time when the executive is going to step into the cubicle farm and say: “Um folks we’ve hit a bit of a bump on the road…actually, it’s more like we’ve driven in the crater of an active volcano. The company is going up in flames, feel free to take anything you can carry on your person and feel free to take a map with directions to the unemployment office on your way out”.
Luckily for you (and for me because I am as talented as a dog with a calculator when it comes to math) calculating burn rate is relatively simple. It’s your initial capital divided by your monthly expenditures. So, say you have $200.000 and your monthly expenses are $20.000 then your company has exactly 10 months before three things happen: it starts making profit, it gets more funding or it throws its hand in the air and say: “Screw this, I’m out!!!”. The last scenario is of course the most catastrophic which I hope is pretty evident. If you cannot figure out why the company going under is the most catastrophic scenario, then you might not want to create a start-up.
4. Feel the Burn
This fact is especially true if your startup doesn’t produce a physical product. Companies that deal in software or services will see that their Burn Rate is closely connected to their extremely crucial human capital or their manpower (for lack of a more politically correct term, person-power maybe?). Hey! Hey! Stop running around firing people, didn’t you read the part that said “extremely crucial human capital”? What are you going to do, develop your software by yourself? Oh, you are? Well, good luck with that.
Do you have any other information regarding burn rate? Let us know in the comment section below.