Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

Wikipedia says Burn rate is a synonymous term for negative cash flow but I neither agree nor believe that is formalized. A company could need turnaround from losses to gains and if the term is mentioned, can it be calculated? Can a time variable be 2 years, 5 years, more or less to calculate "burnrate"? Another definition was Burn rate is usually quoted in terms of cash spent per month.. I'm not sure if it's defined unless we know time limits for a project or company.

share|improve this question

2 Answers 2

up vote 3 down vote accepted

In the dot.com era the Internet was considered a-winner-takes-it-all market, new tech start-ups (like Netscape, Amazon.com and the famous Pets.com) was measured by how much the capital they where able to chew through, the logic being that the more they spend the more aggressive they were (at least in the investors' eyes), conquering this new market known as the Internet.

In this day of age most professionals consider the term “burn rate” sick, and get reminded of the extensive headaches left from when the dot.com bubbles burst. While the music was playing and the party in full swing, everybody thought it was such a good idea, the day after people wished they hadn't been involved :-)

“Burn rate” is more like finance slang, and hence is not formalized. I think what you are looking for is more something like a traditional cash flow analysis; in a turnaround situation, you might be mostly interested in the positive/negative momentum, to be able to work out a prediction.

If you want to dig deeper into the “cash flow analysis” subject, I think your questions will suit better for money.stackexchange.com, as this is very marginally related to quantitative finance, if at all.

share|improve this answer

"Burn rate" is a measure of "spend rate" relative to cash on hand. So if you have $10 million dollars, and you spend $1 million dollars a month, you will "burn through" your cash in ten months, at which time your company will either "take off," get new financing, or go under.

Strategies that rely on "burn rate" are risky ones. Nevertheless, they are successful for a few (mainly tech) companies. This example is "dated" but Xerox around 1960 comes to mind.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.