What is your Burn Rate..

If your company is not yet cash flow positive, you have a burn rate. A Burn Rate is the rate at which a new company uses up its capital to finance overhead before generating positive cash flow from operations. In other words, it’s a measure of negative cash flow.

Often companies begin their business with a loan or owner’s capital investment. The company begins by spending capital on overhead, equipment, office supplies, and advertising packages; all of this activity gives the false impression that the company is moving forward in a positive matter when the opposite is often true.

The burn rate of capital can easily be over looked resulting in a complete depletion of the original funds invested. If the capital is used for overhead and equipment instead of focusing on sales you haven’t created a system that can regenerate the funds needed to move forward from future revenues.

Example: Company is formed and funded with $50,000. $20,000 is used for equipment and furniture, $10,000 to secure and lease the office building, $5,000 is used for advertising. This leaves $15,000 of the original funds for overhead moving forward. Overhead expenses total $3000 per month. 15 divided by 3 gives your new company 5 months before it depletes all of the money invested not counting any other major packages during this time. You now have 5 months to generate positive cash flow from operations that will sustain the company moving forward.

Using the example above you have a $3000 hole to fill every month before seeing any profits. If the sales revenues don’t remain consistent or increasing even funds from a profitable month are depleted for future unprofitable months.

The solution to the problem of burn rate is to focus on sales and reduce expenses to slow the burn rate. The driving force of the company must be sales and increasing revenues to ever turn a company profitable.

We can provide a detailed analyses of your company to determine your burn rate and the effects its having on your company. This will included the focus of capital and employees to determine if there is enough proactive work geared towards sales or if your company’s recourses are being depleted on reactive and spending based projects and activities. Contact us today to discuss your companies burn rate and how it can be improved or eliminated.