Part 1 of 3-Part Series
The term burn rate or burn ratio is one which is often used in the start-up world of business. What is refers to is how fast a new company is using, or “burning” its cash funds. It’s very likely you have never heard that term ever applied to personal wealth management before, and that is because it never really is used when it comes to individuals. At Kismet, we do things very differently, and that is why we’re now discussing this term. As a quick reminder, we manage your wealth as if it were a full functioning corporation, taking every aspect into consideration when planning and making decisions. It is because of this holistic approach that we apply the burn ratio to your own wealth management.
Simply put, the burn ratio tells you how quickly a company is spending money. In your case, it
tells you how quickly you are spending money in your personal life. The reason why this is quite commonly used in start-ups is because they have a set amount of money from their investors and this is what pays for all of the expenses. The reason why it is important is because using the burn rate, it tells them how much time they have before they run out of money and must be profitable as a business by then.
For example, if a company raised 1 million dollars for their start-up, and the burn rate was $100k per month, they would have 10 months before running out of capital. This gives them 10 months to be generating revenue and become profitable before having no money left at all. As you can see, this is one of the most important metrics there is for a start-up because it is a timeline to which they must meet. This is what is known as gross burn rate which uses total spending as the only variable. There is also net burn rate and this takes into account all streams of revenue against expenses and comes up with the final figure. As you can imagine, the net burn rate is the more important and more useful figure as it updates throughout the initial period.
Part 2 continued next week.