Burn rate

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. It is also measure for how fast a company will use up its shareholder capital.[1] If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

This article is about the economics term. For other uses, see Burn rate (disambiguation).

Burn rate can also refer to how quickly individuals spend their money, particularly their discretionary income. For example, Mackenzie Investments commissioned a test to gauge the spending and saving behavior of Canadians to determine if they are “Overspenders.”[2]

Burn rate is also used in project management 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, to refer 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 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.[3]

Some entrepreneurs and investors say that part of the reasons behind the dot-com bust 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 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).

The following text is left in place because some years; worth of students have seen it and learned it: "In earned value management, burn rate is calculated via the formula, 1/CPI, where CPI stands for Cost Performance Index, which is equal to Earned Value / Actual Cost." This is not supported by any serious implementation of EVM and doesn't even make much sense. The correct use of the term burn rate (at least as understood by thousands of professionals in the field), and consistent with the other definitions on this page, is the amount of money being spent in a normal cycle, i.e. AC/[number of time periods]. Its purpose is also the same: to provide a shorthand for quick estimation as to whether and when funding increments will be needed. Since project spending profiles are seldom truly linear, this burn rate should only be used for rough screening; more detailed analysis should follow.

Other uses

The term burn rate is also used in a number of scientific settings:

  • In biology, it can refer to a person's basic metabolic rate[4]
  • In rocketry, it can refer to the rate at which a rocket is burning fuel
  • In chemistry, burn rate can refer to the rate at which a reactant is consumed

References
  1. Ehrenberg, David. "Is Your Company Dangerously Rushing To Scale?" Forbes.com January 4, 2013. Retrieved on May 20, 2014.
  2. Financial Post Story Archived February 5, 2009, at the Wayback Machine
  3. Ron Conway and Mike Maples, lecture and discussion with science and engineering entrepreneurship students, Stanford Entrepreneurship Corner, 2008.01.23
  4. "Calorie Burn Rate Calculator". Calorie Burn Rate Calculator. Blue Cross Minnesota. June 22, 2016. Archived from the original on July 4, 2016. Retrieved June 22, 2016.

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