ⓘ Burn rate

                                     

ⓘ Burn rate

Burn rate is the rate at which a company is losing money. It is typically expressed in monthly terms. E.g., "the companys burn rate is currently.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. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

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.”

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 persons basic metabolic rate; in rocketry, to refer to the rate at which a rocket is burning fuel; and in chemistry.

                                     

1. 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. 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.

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.

                                     

2. 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.

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.

                                     

3. Other uses

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

  • In biology, it can refer to a persons basic metabolic rate
  • 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