burn rate

noun

Definition of burn rate

: the rate at which someone or something (such as a corporation) uses up available funds We had incorporation documents, employment contracts, nondisclosure agreements, and a stock-option plan. Since only one guy was drawing a salary, I thought I could manage our burn rate for a while, but I was feeling a growing sense of urgency. —Charles H. Ferguson, Fast Company, October 1999 The company has $89 million in cash and short-term investments as of January, giving it many years of a cushion even at its annual cash burn rate. —Matt Krantz, USA Today, 18 Mar. 2013

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The first known use of burn rate was in 1984

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burn rate

noun

Financial Definition of burn rate

What It Is

Burn rate is the amount of time it will take a company to exhaust its capital cushion.

How It Works

Burn rate is usually expressed in terms of cash burned per month, but can be expressed according to any time period the analyst finds useful.

Let's assume newly formed Biotech Company ABC has just been granted venture capital (VC) funds to pursue a groundbreaking new drug. The VC firm gives ABC a certain number of years to reach breakeven or even become profitable.

If Biotech Company ABC is spending $100,000 per month beyond what they are bringing in, they have a burn rate of $100,000 per month or $1.2 million ($100,000 x 12 months) per year. The VC firm knows that it will need to provide enough cash to cover that shortfall each period.

Once a company has burned through all of its cash, it will need additional funding from venture capitalists, lenders or an initial public offering if it wants to continue operations.

Why It Matters

Investors look at the burn rate versus expected future revenues of a company to decide if it's worthwhile to invest in the firm. If the company's burn rate exceeds forecasts or if its revenues are not growing at a reasonable pace, it may be too risky to invest in the company. A company may reduce its burn rate by becoming more operationally efficient.

Source: Investing Answers

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