Overheads, Fixed costs & Your Burn Rate
Mar 04, 2022
Overheads, Fixed costs & Your Burn Rate
Do you know how much money your business is burning each day, week or month? If the phone does not ring tomorrow, how much will your business cost you to sit in the office or van and wait for it to ring? Can you answer this, or is it just a guess?
Knowing your regular overheads and what other costs might appear on your bank statement broken down into days, weeks, and months is essential for running a profitable business. But why do so many trade business owners not know how much their business burns each day?
Time is money, and if that is the case, then the money is also time, so if you have not got a handle on your business overheads, you will have to work harder and longer to earn the money that goes back into your less than efficient business. Think a leaky bucket but with time and money falling out of the holes.
Counting your Fixed costs
Every business is different, so please use the following as a guide only to get you thinking and spend some time dialling in on your business overheads on the opposite table.
Professional costs: Your accreditation, Gas Safe, NAPIT or REFCOM, Insurances, Accountants and other professional costs
Motoring: The obvious overheads for trade industries. Besides Road Tax, Van Insurance, MOT and AA/RAC cover, are there any other costs for your motoring?
Core & Sub Systems: Mobile, Internet, VOIP System, CRM and Accountancy software, use the spare and subsystems to add any other costs related to communications or software for your business.
Marketing: Please list your regular marketing overheads here, such as trusted traders, CAT, and long-term contracts with web & SEO companies.
Staff: Name your team here or list the positions within your business and the monthly budget required.
Premises: Do you rent an office or unit? How would a business unit affect your burn rate if you plan to grow beyond your home? List all the costs of renting/leasing premises here.
Other Totals: Have we missed anything? If all the additional costs fit in this area, great. If not, use a spreadsheet to compile all fixed overheads and transfer them to totals on this sheet.
Other variable costs
On top of your fixed costs, you will have the expected and unexpected variable expenses that are not regular overheads or part of the job's you are quoting.
For instance, other variables include additional leads purchased via lead generation sites in quieter months or the three new injectors in the van, only one month after its service. Or how about that unexpected solicitor cost when your former employee got caught speeding in one of the vans? Yes, that example is a little unfortunate and possibly extreme. Still, when running a trade business, unexpected costs will happen from time to time, so we must have a budget assigned for the unexpected.
Think of it as the extra budget, like how you are saving for tax, putting more than is needed away, then taking extra dividends from time to time.
We ALL put money to one side and save for tax, yes?
How many days, weeks and months will you work this year?
Most people reading this article will be business owners, yet many may still be thinking like employed engineers and planning their workload that way. They will budget overheads based on five days a week, 48 weeks a year, not allowing for admin days, business development or one of the main reasons we became self-employed, freedom!
We all have a choice to work the average, or we can choose to make our business fit our lifestyle. How about a four day week? For only 39 weeks of the year?
A business that fits your lifestyle is possible if you make the numbers work. We cannot do this without knowing the numbers, and it all starts with knowing your business burn rate.
On the opposite page, and using your last 6 or 12 months of bank statements, fill in the relevant columns to your business, adding any other fixed costs you may have found on your bank statements. Once you have completed all the subcategories, add them together to find your monthly burn rate. Adjust if you plan to work less than 12 months and calculate the annual, weekly, daily and hourly burn rate. Remember, this number is not what you should be charging; this is simply the cost to pay the expected fixed overheads within your business. You still need to budget for other unexpected expenses, pay yourself, make a profit, and pay your taxes.
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