When it comes to any business, but especially for a start-up, it’s essential to determine how long a company can survive before it must declare bankruptcy and/or close its doors. The biggest metric, especially for a start-up, is to determine how much money a company has to keep its lights on.

The term “burn rate” is defined as how much money a company spends monthly to maintain its operations. It is essential for a company to know how long it can operate before it begins to generate income and hopefully becomes cash flow positive.

It is important to look at two differences between the two sub-meanings of this term: the first is “gross burn” and the other is “net burn.” When it comes to “gross burn,” we are talking about how much a business uses in monthly operating costs. The following formula shows a business how long they have in months to operate.

For example, if a business has $2.5 million available for overhead and it spends $200,000 in monthly overhead costs, it would last 12.5 months. Expressed as a formula:

Available financial resources ($2,500,000)/monthly overhead($200,000) = 12.5 (months)

This assumes the company makes no revenue, which will be accounted for in the next example. However, this is where “net burn” comes into consideration. Net burn looks at how much money a business loses every month, but the difference with this calculation is that it looks at if it can be lowered by any incoming revenue.

If a company spends $10,000 on rent/office space, $20,000 on IT expenses, and $25,000 on employee wages, the gross burn rate would be: $55,000. However, if the company is generating sales at $17,500 per month, for example, and the cost of goods sold (COGS) is $5,000, the following calculation would determine its “net burn rate:”

Net Burn Rate = [Monthly Revenue – Cost of Goods Sold (COGS)] – Gross Burn Rate

Net Burn Rate = ($17,500 – $5,000) – $55,000

Net Burn Rate = (12,500) – 55,000 = -$42,500 Gross Burn Rate

The difference between the net burn rate and the gross burn rate may seem obvious or intuitive, but depending on how much money the start-up has available, and factoring in how much the revenue brings in and offsets the COGS, it can make a stark difference for the business’ prospects.

Once a business has determined what its “gross burn rate” and/or “net burn rate” is, the next step is to look at how to reduce costs and/or increase revenue to keep working toward positive cash flow. 

Two considerations for the company include what the business can do and what it must do to make more revenue and increase profit margins. For example, companies could look at the cost-benefit analysis of incorporating AI to see if it would have an overall positive impact on labor costs. They also could look at how to create effective marketing campaigns that cost less (using backlinks instead of paid search engine marketing, for example).

Another consideration is that if the company has enough time and is able to re-strategize its model, this can have a material impact on the business receiving a cash injection from outside investors.  

Determining these timeframes and figures are one way a company can reduce costs and/or pivot to more profitable products and/or services. These two calculations can provide avenues to re-invigorate a business in hopes of providing a path to profitability.

We all have those days when we dream of striking it rich with a winning lottery ticket. Never having to work again while living a life of luxury. While your chance of finding a four-leaf clover is higher than winning the lottery, we can still dream, right? And while we are dreaming, let’s talk about the best ways to deal with landing such a large sum of cash. And since lottery winners have a limited time to claim their prize, it’s important to take prudent steps when managing the money.

How Much Do Winners Actually Take Home?

Let’s take a look at actual prize amounts from recent winnings. The October 2023 Powerball jackpot of $1.2 billion translated to a cash value of $551.7 million. Depending on what the winner decides – either taking the lump sum or opting for a multi-decade annuity – they have a serious decision to make.

It’s important to consider inflation factors if choosing the multi-decade annuity option. For example, when it comes to 30 payments taken over 29 years, the first consideration is to determine if there’s a 5 percent increase in the amount for each subsequent year. However, it’s important to keep inflation and the value of money going forward in mind.

For example, between March 2021 and March 2023, the average monthly inflation rate was 5 percent or higher, according to Statista Research Department. It peaked during June 2022 at 9.1 percent on a monthly basis. If the lump sum was taken before inflation increased during the post-COVID-19 reopening, or the annuity was increased by 5 percent, lottery winners without a plan to preserve and increase their earnings would have seen their money’s purchasing power decline.

Another thing to consider is how to legally navigate the tax code. For example, when it comes to federal taxes, 24 percent is automatically withheld. According to the 2024 Federal Tax Code, large winnings will put the winner in the 37 percent tax bracket. If the winner is single or married, the 37 percent bracket kicks in at $578,125 and $693,750, respectively. Additionally, winners also are required to determine compliance with state, county, city, etc. taxes. State taxes can vary greatly; looking at you: Pennsylvania at 3.07 percent, and New York at 10.9 percent.

When it comes to being generous through philanthropy, winners can work with their legal and financial professionals to determine how to offset taxes. This can take the form of direct donations, creating a donor advisor fund (DAF) to get the tax benefit immediately, especially if the lump sum is taken, but also if an annuity is taken. With 2023’s standard deduction threshold of $13,850 (single) and $27,700 (married couples), winners might consider how to make charitable donations part of a tax reduction plan.

Another question to ask is whether establishing a trust would be helpful when sorting out one’s distribution of assets. If a winner dies intestate (without a will), the state of that person’s residence will determine who gets your money – regardless of who you may have wanted to receive it.

Similarly, setting up a trust may be beneficial for both claiming the lottery winning anonymously, and it can help determine how to give money to family members. A trust can be set up for a family member or a pet’s care and can be conditional on releasing the funds when the individual reaches a certain age.

While these steps are not comprehensive, and each winner will have unique circumstances, there are many legal and financial considerations to think about immediately upon winning and before claiming a jackpot.

Sources

https://www.irs.gov/credits-and-deductions-for-individuals

https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

Variance analysis is found by determining the difference between what was budgeted and what actually occurred. Additionally, when variances are added together, we get a better picture of how well a company is measuring its performance against expected metrics. It’s also important to be mindful that each metric is measured to determine what the actual cost is versus the industry’s standard cost.

Whether it’s materials, labor, electricity, or another metric, if the actual cost is lower than the standard cost for the same quantity of materials, it would be a favorable price variance. However, if the number of materials was more than the standard quantity, it would be considered an unfavorable variance. Examining variance allows us to analyze the price and quantity of the variable being analyzed. Always keep in mind that unusual or significant variances should be investigated to see why such anomalies exist.

It’s important to distinguish between variances and the types of inputs. When it comes to materials, labor, and similar variable overhead, variances to be analyzed are for price and quantity/efficiency. When it comes to fixed overhead, analysis looks at variances in budget and volume.

One way to conduct variance analysis is through the Column Method. The following example illustrates this:

A business produces widgets. The following assumptions are made:

• 6,000 widgets are produced in a month
• Direct labor hours are used as the basis to allocate overhead costs to products
• Denominator level of activity is 8,060 hours, resulting in $48,360 in fixed overhead expenses budgeted.

Other cost assumptions include:

Direct Costs

Labor: 2.6 hours/widget @ $14 per hour

Materials: 10 pieces/widget @ $1/widget

Overhead

Variable: 2.6 hours/widget @ $8/hour

Fixed: 1.3 hours /widget @ $12/hour

However, the business saw the following costs for the month’s production:

Variable overhead manufacturing costs: $34,000

Fixed overhead manufacturing costs: $50,000

Both of the following are Direct Costs:

Material: 50,000 items bought @ $0.96/widget

Labor: 8,000 hours totaling $128,000

Materials Variance

Real Quantity x Real Price = 50,000 pieces x $0.96 per widget = $48,000

Real Quantity x Industry Price = 50,000 pieces x $1 per widget = $50,000

Standard Quantity x Industry Price = 36,000 pieces x $1 per widget = $36,000

Price Variance = $50,000 – $48,000 = $2,000

Quantity Variance = $50,000 – $36,000 = $14,000

When we find the difference between these two amounts, there’s an unfavorable variance of $12,000. Additionally, it’s worth looking at why there were 50,000 pieces used versus the standardized 36,000 pieces. It could be due to defective materials, problematic machinery, etc.

Labor Variance

Real Hours x Real Rate = 8,000 hours x $16 per hour = $128,000

Real Hours x Industry Rate = 8,000 x $14 per hour = $112,000

Standard Hours x Industry Rate = 7,800 x $14 hour = $109,200

Rate Variance = $112,000 – $128,000 = -$16,000

Efficiency Variance = $109,200 – $112,000 = -$2,800

Based on this calculation, there’s a total unfavorable variance of -$18,800. Management should look at why labor costs are higher than the standard and why production took more supplies than the industry standard.

While this is not all-encompassing, it does show the importance of understanding the nuances of calculating variances and how it’s essential to understanding a business’ (in)efficiency.