Burn Rate

Burn Rate: a popular financial ratio of the dot-com era, is used to determine the number of months before a loss-making company’s cash resource are extinguished. It is calculated by first determining the monthly operating expenses (burn rate), and then dividing this figure into the net cash reserves.

Months to zero cash = Net cash / Net cash operating expenses per month = Net cash /Burn Rate

No company can tolerate losses forever. Eventually they will run out of capital and have to shut their doors and fire all employees. The burn rate helps an investor assess how soon this dark day may arrive. Calculating this ratio quarter-by-quarter can help an investor monitor how progressively the business is increasing sales and decreasing expenses, thus extending the dooms day date, and even one find day emerging with a net profit.