One number the emerging company needs to know is your burn rate. In other words, how much cash are you burning from operations on a monthly basis? How is that number changing over time, hopefully going down some? When would anticipate it coming to break even?

It’s an important number to know for many reasons:

1. How long is your lifeline? It helps you keep a sense on how long is your life line until your current supply of cash runs out and you have to be tapping your investors, banks or others for more capital. You take your cash balance divide it by your burn rate and that would tell you roughly how many months you have until you hit that point. Obviously, you can’t wait until you’re right at that point, in most cases you need to get some capital lined up a couple months ahead of time.

2. Certain types of financing will be interested in knowing this number. For example, suppose you’re trying to get a line of credit from a third tier bank that would be suited for your type of opportunity. They will be interested in knowing how much the burn rate is versus how much cash that you have from investors. This gives them a sense on how long you can cover. They look at it differently than a second or a first tier bank doing a line of credit. They’ll be okay with you having some cash burn. They’ll be okay with you not having positive cash flow yet, but they just want to have a sense in terms of what that burn rate is.

So, take a look at your burn rate and know that number. Look at how it’s been changing over time. Has it been getting down? Hopefully, it’s been declining some. If not, does it make sense that the number’s been growing? Perhaps, you’ve accelerated some product development program or you’ve been doing a launch into some other markets. But, ideally, you want to see that number coming down some over time and have a plan of action worked out to where that will be hitting break even. You want to be able to show that to some particular investors that you might happen to be talking to.

So, make sure you know your burn rate. Otherwise, you could get burned in some discussions with banks or investors.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value