What is your burn rate and why is it important?
Hello, friend. How are you? I hope you're having the best day wherever you are in the world. In today's episode, I want to talk about burn rates, burn rates, burn rates, burn rates, a fancy ass term for how much money you'll be spending every single month. And I want to talk about why it's important to know your burn rate.
Read on for the full transcription or listen to the podcast episode here
So burn rates. Okay, so what is a burn rate? Well, the actual term burn rate I think comes from the investment in startups Silicon Valley scene. If an investor was looking to invest in your company, they would want to know what your burn rate was going to be. They'd want to know, if you were taking 100,000 pounds worth of investment, what are you going to be spending that money on? Why is it important that that's the money you need? So what's your burn rate? What are your outgoings? What are the things that you have to pay every single month to keep the lights on to survive?
Now I personally like to have a burn rate for myself as Alex, personal burn rate, and also a burn rate for my company. And so I like to keep them a little bit separate and I like to be able to see them - I'm a bit of a control freak but I just like to feel secure in knowing they are slightly separate. Because I am essentially the company and I'm the head of the company, and ultimately they are intertwined and the money is intertwined. At the same time, I like to see where the different expenses could be cut back or I like to see where the money is going. And what would happen if I were to change my business model and how that would impact my personal burn rate. So the first thing you need to do if you don't know what that figure is, is to work out every single month what your outgoings are. I'm talking about the fixed. Your fixed outgoings (not the 50 quid extra you spend a month on coffees). So this is your fixed, your rent and bills etc. I'm personally a bit of a spreadsheet nerd. So I like to keep an up to date spreadsheet with my burn rates. And what I will do is, I will look at my outgoings and then I will have a a cash flow forecast of all the money that I know is coming in. And obviously, as soon as you start working for yourself or you start working with clients, there is a lag time between you doing the job and getting paid for the job, especially if you're a company.
For my company, we tend to have 30 day terms, which means that when we finish the project, we'll get paid 30 days after that, so a month later. So it's quite important for me to know what my income is versus what my outgoings are. So once you've got a good idea of your burn rate, - I know that mine is, you know, X amount a month. What's funny is (it's not funny at all, It's actually quite tragic) my business burn rate is twice the amount of my personal burn rate. That's a lot. And so when I look at that figure, and then I look at what I've got coming in, I can divide the number on the incomings column, all the kind of invoices that are overdue, that kind of thing - I can look at that, divide that by my burn rate. And now I know how long I can or I could sustain myself if I didn't get any more work.
So when you first start out, this can be a little bit scary because often you're hand to mouth and you're having to like do, you know, lots of jobs and you're trying to build a portfolio and you're trying to, you know, get that cash coming in. And it takes a while to build up a reserve. But ideally, you want to be in a place where you've got at least three months worth of what we call runway. So runway being the just the the fancy term for you know, well, as you can imagine, it's just the amount of months that you could survive on your current income if you had nothing else. If you had nothing else coming in, that's how many months that you could survive for.
So the bigger picture of why burn rate is important is because it gives you a really good idea of where you're spending your most money. And also, off the back of that, what you might consider cutting down on in order to invest in something else. So for me, especially during COVID, I really went through all of my burn rate, all of those line by line expenses that were fixed for my company, and said "Right, well, that's irrelevant. Now that needs to come down now." For example, my business insurance was well over 1000 pounds a year. And thanks to COVID and a slight pivot towards a slightly different kind of business that I want to do going forward, I knew that I could cut down on X amount. I knew that I could drop my public liability a little bit because I wouldn't be doing any shoots anytime soon. I knew that I could drop my kit insurance because actually, for the last year, I haven't been buying equipment. And actually I've gotten rid of a bit of kit. So I was like, - oh, I haven't even looked at what that would do. It decreased my
insurance by 200 quid or something - like just 200 pounds throwing down the drain, because I hadn't bothered to update it. So it can be really quite therapeutic, especially during a bit of downtime to go through that burn rate and see what you can cut so that then again, you're super lean. If you've got kind a leaner burn rate, as leaner expenses as possible, then all of a sudden, you don't need to chase as much work.
I think this is the big thing for me, that when we get into business, or when we start working for ourselves, we think that the only way to achieve our dreams, our dream life and our dream career our dream success is to 10 x our income, to go after more and more money is to charge more and absolutely I was totally guilty of that for the first five years of my career, that was what I was obsessed with. But what I've realised in recent years, is it actually it's a lot easier to just have a look at that burn rate, keep that burn rate in check. And as soon as you have the comfort of knowing how much money you need every month, then it becomes so much more relaxing.
All of a sudden, you're not chasing after 1000 different clients or you're not chasing after these uber massive projects, because you're like I need them to be successful or to survive or to go on holiday, all of a sudden, you can be like - actually, I've done enough work for the next three months. So now I can be a bit more selective with the clients I go after. I can be a bit more selective with what I spend my time on. Maybe I can even pull back on my client work and I can start to work on some passion projects again. Maybe I can explore a different avenue that I previously didn't have the headspace for.
So just even being aware of your burn rate gives you so many opportunities and so much more breathing room. So that's why I believe the burn rate is one of the most important things that you can do as a person in general, but definitely as a creative or an entrepreneur, and to understand your burn rate, and to understand that kind of the amount of money you need to come in, to give yourself a bit more room to explore different things or just even have a bit more time off. You know, we're all craving that.
And then the next part of this puzzle is when you do start bringing in more money or when you do start kind of earning more, it's really important to keep an eye on that burn rate because it's very easy to get what they call lifestyle creep. This is something massive in the personal finance world. It's something that a lot of stock investors talk about. The fact that actually, the best thing to do is to not go and blow all your money and not let your lifestyle creep up to this, this different level. So you know, all of a sudden, you get used to earning five grand a month rather than three and so you go out for more dinners. You buy the extra stuff on Amazon, you are a bit like lapsy dazy on how much you spend on holidays or things like that. And there's absolutely times where it's like yeah, I worked hard for this money. I'm going to spend it how I want (I've absolutely been there and I will continue to be there because I think it is important to reward yourself for the hard work you do in your business) but actually, sometimes I think about things and I could spend this money on that thing. But that means that I will have to do an extra job in two months time. Or I will have to take on a bit of extra kind or like work on that project and do it myself rather than outsource - that kind of thing. Actually, I just don't want to. And so sometimes it reframes how you look at things. It's very important to just keep your lifestyle in check, and live kind of as humbly as possible. I'm not saying that as you start to earn more money and you start to
build a career or a business that you love that you shouldn't treat yourself. But also just remember, why you wanted to work for yourself or why you wanted to run your own business. It wasn't so that you could work 18 hours a day, it was so that you could actually enjoy your life and do things with your life that you wanted to. So you should always be aiming to make enough money to live rather than chasing after a kind of lifestyle.
This brings me back to a point that I made very, very early - maybe even Episode One of the 31 day challenge I did back in July, which was talking about dream lining and and figuring out what the dream life you want is. How many days or hours you would want to work in order to achieve that life and how much money you would need for that life. And then very quickly, you can get an idea of how much money you need to bring in. So adding that burn rate aspect into this and understanding what your current outgoings are, but then also from dream lining. And if you haven't listened to that episode, or you haven't heard that term before, it was a term popularised by Tim Ferriss in the four hour workweek. And it basically is like, think about the absolute dream scenario for your life. And then write down how much all of that stuff would cost, you know, realistically. And you'll figure out that actually, you don't need a million quid to live that dream life. It's reallr yeally achievable.
And so once you've got that figure that you're aiming for, all of a sudden, you can look at your burn rate as like part of that puzzle, right? Because essentially dream lining is coming up with your dream, burn rate, right? And it gives you something to aim for. I think all of this comes down to the fact of having a grasp on your finances, but also having a good idea of where you're going with it.
Knowing what your ideal situation is, allows you to make decisions about what clients and work you take on.
Honestly, I wish I knew about this years ago because I spent years chasing new jobs, chasing money building a business that wasn't really set up in the way that would give me the life that I actually wanted. And it's only really in the last 12 months that I've really hunkered down to understand this. And you know, I've got my burn rates in check now, and I know what my dream lining figure is. And now I'm building towards that. And that has been an absolute game changer and it does allow me to be a little bit more relaxed about things. It means that I can see what I'm aiming for rather than just thinking - "Oh, the aim is just to make as much money as possible". Well, actually, no, because I know that my ideal life looks like this. And I know that this costs that much money so that's how much money I need to make. So I'm going to go from A to B, right? It's just the most basic thing and I'm sure there's some of you listening to this episode that already kind of knew this or maybe it just reaffirmed it for you. Or maybe it's not the amount of friends in my life that I have this conversation with I go well what's your burn rate? And they're look at me blank and to my friends, I'm like - yeah, but you need to know it's not just your rent. It's your rent, council tax, your bills, it's your Netflix subscription. It's your, you know, your water bill, whatever it might be. It's the insurance that you pay just in case your vacuum packs up or whatever it is. It's all of those things, and they soon add up.
In fact, I remember doing this for my parents actually. Probably about a year ago or so, because I was really into it and geeking out and my older brother, he's similar, he loves like looking at this kind of stuff. So with my parents, we literally went through and found about five different things that they had been paying for without even realising it. They have been paying 1.99 for insurance on my brother, my little brother's Xbox 360 for about 10 years. They've been paying that without even knowing that they were paying it. And literally, as soon as we spotted that, then all of a sudden it was like - "okay, well, let's just quickly cancel that" it literally took about 10 seconds, and that's already saved the money. So yeah, get a grasp of your burn rate.
You can really go forward in your business with a really concrete idea of what money needs to come in for you to survive. And also, if you're someone that is working for someone else, and you're looking to jump out of that and work for yourself, this also gives you that comfort of knowing, right, that is the exact number that I'm aiming for. So it's now not an elusive figure. It's not like - "oh, I just don't even know where to start." It's like - "well, actually, you know that you need to make 1000 pounds from a client in order to make this sustainable for you to jump out of your current job into this new one and maybe I'm going to go after two clients each pay me 500 pounds and once I've got that, then I'll you know, then I'll know that this is really achievable."
So anyway, those are my thoughts on burn rates, why they're important. I hope you found this interesting.
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