Financial jargon can sound a little intimidating. Terms like Burn Rate sound like something out of an action movie, but in reality, they are just simple ways to measure how much gas is in your business’s tank.

Understanding these numbers is the secret to moving from “stressed-out owner” to “confident CEO.” Here is how you can find your business’s health in two easy steps:

Step 1: Find Your Burn Rate

Burn rate is just a fancy way of saying: “How much money does my business consume?”. Whether you look at it by the day, week, month, or year, it is the cost of keeping your business running. For example, if you spend $1,000 a day, your monthly burn is $30,000.

The Quick Calculation:

• Grab your bank statements: Look at the last three months of activity.

• Total the exits: Add up all the money that left the bank accounts during those three months.

• Divide by three: This gives you your average monthly burn rate.

Pro Tip: If you are transferring money between your own accounts, don’t count those transfers! They aren’t “spent” money and including them will overstate your burn rate.

Step 2: Determine Your “Sleep at Night” Number

Once you know what you spend, you need a safety net: your Cash Reserves. This is your business’s “rainy day fund” that sits in your bank account just in case you need it someday.

While service businesses are generally advised to keep between 1.25 and 2.5 months of operating cash on hand, many owners prefer to think in terms of business functions:

• The Payroll Cushion: Keeping three payroll cycles ready to go.

• The Utility Safety Net: Knowing the lights will stay on for two months without worry.

• The 90-Day Guarantee: Having enough to pay every vendor, subcontractor, and employee for the next 90 days.

Whatever that goal is for you, that is your “Sleep at Night” number. Once you attach a specific dollar amount to that goal, you have a clear target for your cash reserves.

Why It Matters

Knowing these two numbers gives you instant insight into the health, longevity, and viability of your business. When you know exactly what you’re spending and exactly what you have saved, you can stop guessing and start growing.