The 40% Rule

I&#x27;d never heard of this rule, so I can&#x27;t say it was planned but I&#x27;ve just done the maths on our startup (<a href="http://macropod.com" rel="nofollow">http:&#x2F;&#x2F;macropod.com</a>) and we&#x27;re exactly on 40%.<p>I certainly didn&#x27;t use this equation, but our monthly expenditure is controlled quite heavily by our growth rate. So maybe there&#x27;s something in that....I think I&#x27;ll go work out whether this hold true for various growth rates using our method...<p>FWIW:<p>- I have a spreadsheet which maps out our revenue and expenses over the past 2 years.<p>- It estimates our future growth<p>- It combines that with our bank balance and our expenses to work out an &quot;optimum burn rate&quot;.<p>- We use this number as a guide to how much we should be spending.<p>The &quot;optimum burn rate&quot; is the spend that will see us use as much of our cash as possible without us dropping below a certain threshold (which at the moment 3x our monthly burn).

Maybe I&#x27;m missing something important, but I don&#x27;t see any rationale behind this. What makes 35% or 45% worse than 40%?

You could apply the 40% rule to personal finances as well. If your income&#x2F;salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.

I think this rule is a nice generalization overall but for my money I would discount natural segment growth from the company&#x27;s year on year.<p>So, if the market (ie mobile payments) is growing 50% YoY and the company is only growing at a rate of 25% that&#x27;s actually pretty bad.

This works as a good &quot;rule of thumb&quot;.

<i>Your annual revenue growth rate + your operating margin should equal 40%</i><p>My immediate reaction: So I guess I need to cut Tarsnap&#x27;s prices and slow its growth rate?<p>On further thought, I suspect &quot;should equal&quot; should be &quot;should equal or exceed&quot;.

This literally means that you can lose as much money as you want as long as you grow at a stupid-fast rate. It doesn&#x27;t matter what you&#x27;re building or whether anyone wants to pay for it, as long as you get what the monkeys call a &quot;hockey-stick curve&quot;.<p>You&#x27;re OK even if you literally win at losing. Good to know.<p>This explains so much.

When I was in school the professor said something about interest rates and opportunity costs that was more algebraic than arithmetic; but I guess that is all academic.