Burn rate is a term used to describe a startup that is not yet making more money than it spends. It makes a lot of sense if you can imagine a company like Uber thinking, hmm – we need users, but to get users we need a fully set up ride-sharing system, and to have enough money to build and maintain a fully set up ride-share system we need a fully set up ride sharing system to generate enough revenue to pay for the development alone.
If you are a small business (not a startup usually) you might think – is there a market here? Does anyone actually want to buy icecream, from me, on this corner in the middle of nowhere. So you might start by making a batch, selling to your friends, going to a local market for a few months, making sure people want your product, opening a small online store, processing orders for delivery, then eventually open a shop front, then another THEN TAKE OVER THE WORLD.
You might call this strategy a start small; proven market, grow to meet demand, strategy.
In contrast – thinking like a growth-fuelled startup – if we put together a team of coders and instead of building up from small, launch an Uber with an MVP that appeals to your audience, already working and growing from there… while burning through a pile of cash, desperately trying to break even and turn big bucks of profit…
Burn rates apply to your own personal life and finances too. the You Need A Budget website, as well as a few books on personal finance (that after a while start to all overlap), say similar things, think of your bank account as a runway, think of your daily, weekly and monthly spends as your speed down that runway. The bigger your bank (or savings) budget, the longer the runway is.
Remembering of course that as a startup or a business you want to be travelling fast enough to take off (you want your finances to carry you for your whole life, or for the business to start lifting itself). For your personal life, if you get sick for a month, if you break a leg and can’t go to work – how long of a runway do you have before you crash on a friends couch because you ran out of money to pay rent… If you’ve never thought about this, maybe you don’t need to. Or maybe you have never yet needed to, and that time will come when you will need to be prepared for the next black swan.
The point is that burn rates exist as a concept, and your runway is only so long before the banks start foreclosing on your house and you are pawning your measly possessions to scrape by.
Learning from this
I know I don’t ever take actions without instructions. So here they are:
- Look at your bank account.
- Work out how much comes in each month (if you get paid in a regular cycle, use this, don’t bother calculating things right now)
- Work out how much goes out each month (or other cycle)
- If the money/savings is going down STOP AND FIX THIS RIGHT AWAY. This short instruction set will not tell you how, google it.
- If the money is going up, work out how many months (or cycles) ahead you are. So if you were removed from your ability to earn, but still had to pay all your expenses up until you ran out of money – how much time would you have to burn?
- Are you okay with that length of burn? Some industries are easy to get a job in, some are harder. A highly specialised programmer might have a high paid job but be out of work for six months if they get laid off.
- Contemplate future major spending – i.e. owning a phone, computer, car, house, investments, or other large lump sums. How long until you can afford both that large expense and a few cycles of burn?
- If a relative or friend called you tomorrow to borrow a few thousand dollars, would you still have enough burn?
This exercise in checking out your finances does not tell you how to fix them, but it can hopefully make you ask the question, “am I okay with the current state of affairs?”
Meta: this took less than an hour to write.