Posted in Finance, Accounting and Economics Terms, Total Reads: 290
Definition: Burn Rate
Burn rate is the ratio by which a new organizations utilizes its funds (own capital or investor's money) to pay for its expense even before generating any revenues for the company. If the burn rate is on the higher side, then the company would end up using all the funds and would end up bankrupt or would close down.
The initial expenses used for creating a business is known as burn rate. The expenses include spending money on infrastructure, hiring employees, making processes, acquiring customers marketing & advertising etc. Companies make a forecast while evaluating burn rate. This terms has gained more popularity in the online business market, where young startups are gathering capital from investors and using it to set up the business.
Burn rate gives the investors an idea about the financial position of the company. The basic formula for burn rate is as mentioned below:
Burn Rate= (Cash inflows - Cash outflows)/ Time period
A higher burn rate indicates that the company is using the investor funds at a fast rate and vice versa. Investors keep a strict vigil on the burn rate to understand how and where the funds are being allocated.