What's burn rate, you ask?
It is a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.
Burn rate becomes an important management measure, since it together with the available funds provides a time measure to when the next funding event needs to take place.
For me the burn rate is slightly different, it's my reserves, cash and credit lines. It's how long I can stay in business without any income. I calculate it in weeks. My burn rate is around 25/26 weeks, or around 6 month. Some photographers, that I know, have a burn rate of 100 weeks or almost 2 years. The higher your reserves:
- The better you can weather the recession.
- The more choice that you have, should you take this new special project? or look at this new area?
- The better you decision process, because you are not as pressured.
- It can make the difference between staying in business and going out of business.