The story of rates: burn rates, interest rates, inflation rates

201601-unsplash-clock-photo-1445109673451-c511bb51bd17Have you heard of a burn rate? It’s often used in the context of spending, as in you’re spending $10 million per year, so you have a $10 million annual burn rate.

What about a run rate? It can be synonymous with burn rate. Or a run rate could be used to describe how quickly a company acquires new customers, or the rate at which a business generates revenue.

You’ve probably heard of growth rates. These rates measure how much some quantity, often revenue or earnings, grows in a given amount of time.

What do all these terms have in common? They all communicate how some quantity changes with time. That’s the meaning of the word “rate”. When you think of rates, you’re thinking of something happening over a given period of time.

It might be cost, or revenue, or earnings, or customer count, or any other measurable aspect of a business. When you talk about how any of these quantities change over some period of time, you’re talking about a rate.

It’s important to know the unit of time involved. Sometimes you’ll talk about monthly burn rates, or quarterly run rates, or annual growth rates. The time period matters. If you’re sloppy with your vocabulary, you can quickly confuse yourself and others.

The time element might be subtle. You’ve heard of interest rates. In this case, you’re talking about what fraction of a loan amount is charged as the cost of borrowing money. And that fraction is due annually. So, the “annual” part is implicit in common conversations about interest rates.

The same thing happens with inflation rates. You’re talking about how much prices change from one year to the next (year-over-year). Again, the “annual” part is implicit when we talk about inflation rates.

It’s easy to be sloppy when discussing rates. You need to know both the quantity involved and the time period of interest. Precise vocabulary will help you cut through some pretty frustrating confusion.

 

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