Burn Rate What It Is And How It Influences Firm Value

Money is key to the success of any business. Understanding how quickly cash is going out of your firm is just as essential as tracking incoming cash movements.

The burn rate is the rate at which a new corporation uses up its venture capital that will finance overhead before generating obvious cash movement from operations.

The burn rate is usually quoted in terms of cash spent per month. For instance, if a corporation is said to have a burn rate of 1 million dollars, it would mean that the corporation is spending 1 million dollars per month. If the company has only 1 million dollars in its bank account, it's expected to go bankrupt in one month. If, on the other hand, it had 10 million dollars in the bank, it's expected to bankrupt in 10 months.

It's important to know how long it will take for a company to burn through its cash. Learn how to calculate and interpret a cash burn rate.

Burn rate is especially an issue for startup companies that are typically unearnable in their early stages and are usually in high-growth industries. It can take years for a corporation that will generate earn from its sales or revenue and, as a result, will need an adequate supply of cash on hand that will meet expenses.

How does the burn rate affect Value?

As the burn rate is lower, the company is expected to survive for a longer period, and therefore the firm's value is expected to be higher.