finances

Term of the Week: Burn Rate

At first read, it would have been easy to assume that burn rate had something to do with a heat press or another decoration process. However, burn rate is an accounting term every business owner should know. A business’s burn rate is the rate at which it spends money. Calculating the actual value of your business's burn rate isn't difficult. First, record how much cash you have on hand at the beginning of a given quarter. Second, record how much cash you have on hand at the end of that period. Then, use this simple equation:
 
Cash on hand at the beginning of the period — Cash on hand at the end of the period = X
 
Record the X value, then use this equation:
 
X / # of months in the period = burn rate 
 
Fundera, a financial resource for small businesses, offers an example:
Let's say you had $12,000 in the bank at the beginning of the quarter, and at the end of the quarter your bank balance is $6,000. This means over the three month period, you spent $6,000. Dividing $6,000 by three months, you can see your burn rate is $2,000/month. Knowing how fast your business goes through cash is critical when it comes to cash flow management. Ideally, you want to have a negative burn rate, because that indicates you are growing your cash reserves. The exception to this rule is when you are investing in the growth of your business.