Cash Burn Rate
The rate at which a company utilizes its cash supply over a specific period of time is known as the cash burn rate. From its name, it is clear that it is used to measure the speed at which cash ends or is burnt in consumption. It is specially used in such situations where the cash flow of the business activities is negative rather than positive. It is meant for such businesses that have been started newly and because of this they have not managed to make much of the sales that could cover up the expenses.
With the Cash burn rate, a company is able to measure its sustainability which ultimately tells what its future financing will be. This helps investors to decide which company they should invest in. If a company’s Cash burn rate is high, then investing money in such a company can be risky. Therefore, the investors avoid providing finance to such companies as their investments might turn into ashes.
If a company’s Cash burn rate is increasing from a quite long time then it will only have to survive on borrowed finance. As mentioned above too, investors thus pay close attention to the burning rate of the company’s cash before providing capital.
Burn rate mostly bothers companies that are going unprofitable in the industry or those that have newly started their businesses. It might take time for the new companies generate enough cash in order to meet the operating expenses and therefore, they will need a significant amount of money in hand in order to meet the needs. It has been observed that many of bio-tech and IT companies have to survive on borrowed capital for years.
Cash burning is surely a thing that a company should worry about because if the burn rate is higher, then a company might have to shut down its business.