financial reflections

The concept of a burn rate is pretty important for companies just staring out.  It refers to the rate that a young company is “burning” through the cash that venture capitalists or other investors have put up.  And sometimes it’s pretty large.  One startup I worked for burned cash at the rate of 1.5 million dollars a month.  It’s been sold to another company now.

Of course with a start-up, the burn rate refers to the amount negative cash flow for a company.  A start up can get away with that - for a while at least - while it’s trying to move towards a profit.  Startups can get away with that (or at least they do sometimes) but you and I can’t.  That’s why it’s important to know how much of our income we “burn” every month, so we don’t burn too much.

Finding a burn rate is simple is one does a monthly budget.  Add up all the bills, and all the expenses and that’s your monthly burn rate.  I calculate my minimum payments on my cards, and try to include a twelfth of my annual payments, such as homeowners association dues, car registration and the like.  Sound simple, and it is.  But I have this feeling that not many people really know how much they spend each month.

Knowing your personal burn rate is important for two reasons.  First, I’ve gone on about how imporant an emergency fund is for personal financial safety.  Most experts seem to indicate the need for three to six months of savings in your emergency fund.  That’s almost impossible to figure out unless you know how much money you use in a single month.

Second, knowledge of your burn rate lets you know if you really are operating with positive cash flow.  I found that when I didn’t know how much I was spending, I was apt to overspend and charge items, planning to pay for them later with money I’d never have because my burn rate was too high for my income.