Is Your Business Burning at Both Ends? | SBDC UNF

Is Your Business Burning at Both Ends?

The “burn rate” measures how fast a company uses up initial capital, at which point the company needs to generate cash internally by making a profit, find additional sources of capital, or close the doors.  “Burn rate” is also used to measure how much capital your business “burns” in covering fixed expenses each month that must be paid regardless of your level of sales.

Think of it this way: if you’re on a diet, you want to burn calories fast.  But when it comes to cash, the slower the “burn rate” the better.  If you combine that diet with an exercise plan, you want to monitor your heart rate to make sure it doesn’t get too high or too low.  Likewise, you want to set up a method to monitor, and manage, the flow of cash in and out of your business.  A rate that’s too slow could indicate a failure to innovate or expand.  And if the rate is too fast, then the risk is going out of business because you can’t pay your bills.  

It’s important to develop strategies to manage your company’s “burn rate.”  First, set up a system to monitor cash flow.  Keep an eye on revenue, paying attention to declining sales and profit margins.  Consider new ways to generate sales.  Create and enforce policies that speed up collection of your accounts receivables.  Next, pay attention to normal business expenses.  As the owner of the business, consider signing every check that goes out to control unnecessary spending.  Take discounts by paying vendors early when you can.  Finally, carefully evaluate major expenditures before you commit to them.  These one-time investments increase the speed of your “burn rate.” 

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