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Definition

Burn rate

If a firm operates in the red, its negative real-time cash flow, usually computed monthly, is called its burn rate. A company’s burn rate is the rate at which it is spending its capital until it reaches profitability. Although negative cash is sometimes justified early in a firm’s life-to build plants and buy equipment, train employees, and establish its brand-it a cause severe complications. A firm usually fails if it burns through all its capital before it becomes profitable. This is why inadequate financial resources in one of the primary reasons new firms fail. A firm can simply run out of money even if it has good products and satisfied customers.

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