burn rate

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.