Cash isn’t like calories. Those, you want to burn up fast. But when it comes to the cash consumed by your startup business, the slower your “burn rate,” the better.
Knowing the burn rate in your new business and managing it well will tell you – and indicate to your investors – when you’ll need more investment or a loan, or when you will break even and begin to make a profit.
If you forget to check this compass within your new business, you could run out of cash before you reach those milestones – and find yourself burnt out of business.
Learn to calculate the burn rate for your startup business
Simply put, your burn rate is how much capital you go through each month. When you start up, you begin with a specific amount of capital – let’s say $100,000 as an easy example. You decide that it takes $10,000 a month to operate your new business, with no revenues projected during the first year. That means your burn rate is $10,000 a month. In this example, you’d be in trouble if you don’t start making money by your 10th month in business.
As a rule, you need to review your burn rate every month, just as you do the components of the burn-rate equation: expenses and income.
“It’s no different for a company than it is for an individual: How much do I make a month, and how long is it until payday?” says David Brophy, a professor of venture capital at the University of Michigan. “It’s as old as dirt and as fundamental.”
Carefully monitor your burn rate
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