What’s Your Financial Burn Rate? 5 Questions and Answers

What you don’t know about your financial burn rate can burn you.

 

One of the key financial indicators for a business is “monthly financial burn rate.” Failure to know and plan for this key indicator can cause a company to go up in smoke or, worse, burn. The FlowFirstTM business management model is built around maximizing cash flow. To achieve this, a company must first know how much cash they require to operate on a monthly basis. This monthly cash requirement, or financial burn rate, is the amount every company must have access to in order to fulfill its fixed or recurring expenses and obligations.

1. Why is Financial Burn Rate Important to Your Business?

Burn rate is vital for planning purposes, and successful business owners are very in tune with this monthly number. Most importantly, the burn rate tells business owners the minimum amount that they must either collect from customers or have in reserves every month, so that they can meet recurring expenses or obligations. Be informed when it comes to your monthly burn rate because what you don’t know can definitely burn you.

2. What Are Monthly Financial Burn Rate Reports?

For most companies, one of the key management reports generated each month is the monthly financial burn rate report. In larger businesses or companies, the burn rate can change every month. Examples of some changes include new debt, payroll changes, retiring of old debt, new vendor expenses and new operating leases. Knowledge of the monthly burn rate will help companies make important decisions such as whether to take on new work or projects, or if the company can afford to hire new full-time employees. Many times, additional staffing is required to tackle a new or larger project and this results in a commensurate increase in payroll.

 3. How Is the Financial Burn Rate Report Used?

In most cases, there’s a lag between a payroll increase and the receipt of payment from the new project. If business owners are not aware of their current burn rate, they can’t plan to meet the necessary cash-flow requirements. The financial burn rate report supplies management with the information needed to avoid this type of problem when deciding to take on a new client. With this knowledge in hand, companies can plan for the cash lag involved in a new project by obtaining lines of credit, securing additional capital or taking out a loan, to name but a few options.