Too few people running manufacturing SME’s understand in sufficient detail the value of understanding and managing their product portfolio with one eye (at least) on their break-even point and burn rate. To my mind these are critical measures that should be reviewed and interrogated as a standard part of being a responsible manager.
The break even point in a multi-product manufacturing operation will vary depending on the gross margin from the differing mix of sales. This has been to date a challenging calculation, dependent as it is on a variety of variables, particularly the forecast of sales volumes of the product portfolio. However, it is a perfect use case for AI to be deployed, so there is no longer an excuse.
The ‘brother’ of break-even is your burn rate.
Every business has a burn rate, the ratio of cash in to cash out. It is a critical calculation, particularly in a start-up environment.
It tells you when you will run out of cash.
When seeking a capital injection, your burn rate will be one of the first numbers isolated by a potential funder.
A potential investor or lender will always ask two critical questions:
- How are you going to spend the money?
- How long will it last?
The general use of the term is in relation to startups, but it is just as important, albeit not as top of mind, in an ongoing business.
It is really a simple calculation. The ratio of cash you are spending every period, to the cash you are collecting, divided by the cash in reserve. In a crisis, that period may be daily, or weekly, but it is most often monthly.
Startups are inhabited by optimists. Nobody but an optimist would put themselves through the wringer of creating a start up. As a result, it is almost inevitable that revenue forecasts will be inflated, and costs receive too little critical thought. That is until almost too late, at which point the hatchet comes out, and potential funders run for the hills.
