What does high burn rate mean?

High burn rate is the outcome of a company that burned through their cash reserves faster than expected.

A company with high burn rate will find itself scurrying for cash from banks or creditors, and a higher likelihood of experiencing a state of financial distress, be forced to merge, or even go bankrupt.

Definition of burn rate

According to Investopedia, the burn rate is commonly used to describe the rate at which a new company is spending its 'venture capital' money to finance its overhead before generating positive cash flow from its operations.

It is a measure of negative cash flow, and the burn rate is usually quoted in terms of 'cash spent per month'.

In general, the burn rate is used by startup companies and investors to track the amount of monthly cash that a company spends before it starts generating its own income. It also helps to evaluate how quickly a company will run out of cash.

In 'Startup Survival and a Balanced 'Burn Rate'', Ron Berman (Assistant Professor of Marketing, Wharton School of the University of Pennsylvania) and Pablo Hernandez-lagos (Assistant Professor of Economics, New York University Abu Dhabi), remarked that 'an entrepreneur's education and confidence about possessing a competitive advantage over competitors have a positive relationship with balanced spending leading to lower failure rates'.

Therefore, how a startup/company manages its level of spending, or burn rate, will determine whether it will succeed or fail.

Return to Glossary of business failures or read "High Employee Turnover".

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Last edited on 21 October 2020.