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

Firefighters fighting fire during training Latin Business Today

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 monthly. This monthly cash requirement, or financial burn rate, is the amount every company must have access 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 burn you.

  1. 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.

  1. 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.

  1. What’s the Difference Between a Burn Rate and a Budget?

It’s important to remember that the monthly burn rate schedule is different from a budget. A budget incorporates projected amounts that may or may not materialize, such as capital expenditures, future investments, and other revenue-based expenses. A burn rate schedule, on the other hand, would not include capital expenditures if they weren’t recurring expenses or if they were paid for all at once. In fact, one of the major differences between a burn rate report and a budget is that burn rate only incorporates monthly obligations that must be paid regardless of the sales activity for the month.

Additional employees hired for special projects, for example, would be included in a financial burn rate report because new employees would be added to the payroll, which must be factored into monthly expenses regardless of sales volume. Independent contractors that are hired to perform a specific job, however, may not be included in a burn rate report because the expense may not recur.

  1. What Is Financial Flow?

Financial flow is one of the key cornerstones of the FlowFirstTM management model. Financial flow is defined as a company’s ability to record and execute accounting and financial transactions, in order to report the results to management. Financial burn rate reports, along with other monthly closing reports, are vital to the running of the business and must be a part of the monthly closing process. Don’t get burned when it comes to keeping track of recurring monthly expenses. Knowing and updating your burn rate schedule is one of the keys to maximizing financial and, ultimately, cash flow.

Related articles:

3 Questions to Optimize Your Financial Performance

Cash Flow Management for Small Business Owners

8 Recommendations for Safeguarding Cash Flow

This article was co-authored by Mark Kaufmann, consulting technical writer.

RELATED POSTS

Your Brand Is Not What You Think It Is…

Your Brand Is Not What You Think It Is…

Let’s talk about FEELINGS... If you look at today’s marketing and business headlines, there is a lot of chatter about BIG data and AI - it’s everywhere. This compelled me to recently tweet the following “It’s all about BIG data these days but we must never forget the...

Go From Mundane to Marvelous: Cultivating Joy in Your Job

Go From Mundane to Marvelous: Cultivating Joy in Your Job

Everyone is realizing that doing something they love for a living is becoming a necessity for their soul. When I graduated from high school, I wanted to become a psychologist, but I had to put my dream on hold and start working full-time to pay for college. I applied...

Gratitude- 5 Steps To A Sincere “Thank You”

Gratitude- 5 Steps To A Sincere “Thank You”

Gratitude can improve your business and add much, much more to your life. The simple act of saying "Thank you" typically conveys a sense of gratitude. But it must be genuine to be truly effective. And a dynamic "Thank you" is much more effective than a static one. So,...

Video Gallery

Polls

Sign Up for the Latin Biz Today Newsletter

PR Newswire

Featured Authors

avatar for Antonio PegueroAntonio Peguero

Antonio Peguero, Jr. is Counsel to Rivera &...

Ramp Up Business With U.S.-Latin America Trade

Innovation & Strategy

Money

Talent/HR

Legal

Marketing

Mi Mamá Es Una Brava

Mi Mamá Es Una Brava

She was fierce, unapologetic, unselfish and brava. Editor's note: This is a reprise piece from Gaby Alcantara Diaz remembering her late parents and brother.   Over 21.2 million (all) immigrant women reside in the United States since 2013 with many traveling by foot,...

Culture

Mi Mamá Es Una Brava

Mi Mamá Es Una Brava

She was fierce, unapologetic, unselfish and brava. Editor's note: This is a reprise piece from Gaby Alcantara Diaz remembering her late parents and brother.   Over 21.2 million (all) immigrant women reside in the United States since 2013 with many traveling by foot,...

Fashion

Food

Music

Sports

Chiefs Repeat, Closer to (but Not yet), a Dynasty [Video]

Chiefs Repeat, Closer to (but Not yet), a Dynasty [Video]

A 360 recap of Super Bowl LVIII Latin Biz Today advisory board member & Sports lead and two of his sports management students weigh in on Super Bowl LVIII The Aftermath  It’s hard to put into words why anybody would be shooting at a Super Bowl parade and killing...

Work & Life

Mindfulness

Health & Fitness

Travel & Destinations

Personal Blogs

Pin It on Pinterest