Burn rate is the rate at which a company is losing money. It is typically expressed in monthly terms. E.g., "the company's burn rate is currently $65,000 per month." In this sense, the word "burn" is a synonymous term for negative
cash flow
A cash flow is a real or virtual movement of money:
*a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
. It is also a measure of how fast a company will use up its shareholder capital.
[Ehrenberg, David]
"Is Your Company Dangerously Rushing To Scale?"
''Forbes.com'' January 4, 2013. Retrieved on May 20, 2014. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.
Burn rate can also refer to how quickly individuals spend their money, particularly their
discretionary income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major ...
. For example, Mackenzie Investments commissioned a test to gauge the spending and saving behavior of Canadians to determine if they are “Overspenders.”
Burn rate is also used in
project management
Project management is the process of leading the work of a team to achieve all project goals within the given constraints. This information is usually described in project documentation, created at the beginning of the development process. T ...
to determine the rate at which hours (allocated to a project) are being used, to identify when work is going out of scope, or when efficiencies are being lost. The term is also used in biology, to refer to a person's basic metabolic rate; in rocketry, it refers to the rate at which a rocket is burning fuel; and in chemistry.
History
The term came into common use during the
dot-com era
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Comp ...
when many start-up companies went through several stages of funding before emerging into profitability and positive cash flows and thus becoming self-sustainable (or, as for the majority, failing to find additional funding and sustainable business models and thus going bankrupt). In between funding events, burn rate becomes an important management measure, since together with the available funds, it provides a time measure to when the next funding event needs to take place.
Ron Conway
Ronald Crawford Conway (born March 9, 1951) is an American venture capitalist and philanthropist. He has been described as one of Silicon Valley's " super angels".
Early career
Conway graduated from San Jose State University with a bachelor's d ...
and Mike Maples
lecture and discussion with science and engineering entrepreneurship students
Stanford Entrepreneurship Corner Stanford Technology Ventures Program (STVP) Entrepreneurship Corner (ECorner) (Formerly Educators Corner) is a free online archive of entrepreneurship resources for teaching and learning. The purpose of the project is to support and encourage facult ...
, 2008.01.23
Some entrepreneurs and investors say that part of the reasons behind the
dot-com bust
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compos ...
was the unsound management and financial investor practices to keep the burn rate up, taking it as a proxy for how fast the start-up company was acquiring a customer base.
In project management
Aside from financing, the term burn rate is also used in
project management
Project management is the process of leading the work of a team to achieve all project goals within the given constraints. This information is usually described in project documentation, created at the beginning of the development process. T ...
to determine the rate at which hours (allocated to a project) are being used, to identify when work is going out of scope, or when efficiencies are being lost. Simply put, the burn rate of any project is the rate at which the project budget is being burned (spent).
References
External links
Burn Rate Info and Related Reports
{{DEFAULTSORT:Burn Rate
Cash flow
Business terms
Business indices