As you consider your projected income statement, I hope you see three of your spending budgets there — the cost of sales, the payroll, and the expenses. These also contain your fixed vs. variable costs, and your burn rate, which we went over in the Chapter 4. Those are good numbers to keep in mind.
Why do fixed costs matter? They add to the risk. You have to pay them, whether you’re making money or not. Some companies reduce risk by trying to make as much as possible into variable costs, depending on sales, instead of fixed costs. For example, to make programming expenses variable instead of fixed costs, contract the work by milestone, or pay less fixed compensation and more royalty on sales.
The burn rate is the same thing. It’s a sense of risk. If you know you need $10,000 every month to cover your burn rate, then when you watch your sales you have an instant sense of where they have to get.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
