Understanding your expenditure is absolutely critical. That’s why calculating your burn rate is one of the best ways to stay in the red.
What is burn rate?
For many businesses, their journey often begins with the organising and managing of funds.
But before financial institutions, like venture capitalist firms or investment banks, are ready to hand over large sums of capital, they first need adequate evidence of a company’s expenditure.
This is where your burn rate enters the conversation.
Making sure you correctly calculate your burn rate is paramount to the growth and survival of your business.
However, while the practice is largely targeted toward startups, a detailed record of your expenses can be beneficial for any business type regardless of its maturity.
How to calculate your burn rate?
To accurately calculate your burn rate, your company must be aware of two specific criteria:
Cost of growth
The cost of growth simply refers to the cost of overall operational expenses.
This can be anything from renting an office space, paying your employees, as well as any benefit schemes you might have planned to put in place.
Unit economics are a way of simplifying the initial metric-ladened headaches that overwhelm many new startups who already have far too much on their plates.
Unit economics helps this by asking one simple question: can you make more money per customer, or per unit, than it would cost to secure them?
By making these calculations, you’ll have a greater understanding of how much money you’re funnelling out, giving you an indication of how long your business is likely to survive.
Is a high burn rate always a bad thing?
Not necessarily, no.
The investing game will always be a double edged sword. When asking for a sizable portion of an investor’s money, a high burn rate will often indicate one of two things:
- That you’re spending more than you’re making and will likely lose it in time.
- That you’re not spending enough and won’t use the amount asked for effectively.
To put it another way. If you’re only willing to spend a relatively small amount of money, then why ask for such a large amount.
Every business requires its own way of managing funds, usually depending entirely on the sector you’re working in. What works for one might not mean success for the other.
However, regardless of your burn rate, you should always ensure to have at least six months worth of cash available for expenses.
For a better understanding of your expenses, why not get in touch with us today? and see how your burn rate might vastly improve investment opportunities in the future to come.