Burn rate definition

Burn rate is a measure of the speed with which a business is spending its cash reserves. Burn rate is stated as the amount of negative cash flow per month. The calculation is:

Total cash on hand / Cash spending per month = Burn rate

For example, a business has $1,000,000 of cash on hand and its burn rate is $100,000 per month, so it has 10 months in which to begin generating positive cash flow or to find additional sources of cash. Another alternative is that the firm begins to cut its expenses, thereby reducing its burn rate and extending the amount of time that it can remain in business. The burn rate concept is most commonly applied to startup businesses, which only have a certain amount of time to achieve positive cash flow before their startup capital is drained.

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