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| Burn Rate Reports / Cases / Articles & Other Related Links |
| Research Reports on Burn Rate Analysis of the Burn Rate in the US Airline Industry (Report - will be published end of July - check back for link). This is a follow-up to the US Airline Industry Research Report from July 2008. JetBlue Burn Rate Analysis (Report - will be published end of July - check back for link). JetBlue has a case study soluiton related to its IPO offering (click here for the JetBlue case study solution). This can serve as the follow-up analysis Case Study Solutions on Burn Rate ServerVault (Case Study Solution - will be posted end of August - check back for link) |
Overview of the Burn Rate Financial Measure
July 16, 2008
July 16, 2008
This is an overview of the Burn Rate financial measure and reports / case study solutions that analyzes the burn rate.
Definition
The definition of a firm’s burn rate is an estimate of the rate of cash consumption. The burn rate is a synonymous term for negative
cash flow. It is a financial measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted,
the company will either have to find additional funding through debt or close down.
Dot-Com Era
The term burn rate became popular in the financial community around the year 2000. Companies and stock analysts started tracking
burn rate as a financial measure during the dot-com era at the peak of the internet bubble. At this time, many start-up companies went
through multiple stages of funding before emerging into profitability and positive cash flows and finally becoming self-sustainable. But
for the majority, they failed to find additional funding and sustainable business models and eventually went bankrupt. In between
capital funding, burn rate becomes an important financial management measure, since it together with the available funds provides a
time measure to when the next funding event needs to take place.
Financial Strategy
The burn rate has an impact on the financing strategy of the companies’ growth. The burn rate will impact the following details of the
financing strategy; timing, amount, type of financing and many aspects of the operations of the company. Many of the aspects that the
burn rate influences are interrelated.
Replenishment Point
The timing is based on the replenishment point for the firm. The firm cannot allow the capital to reach zero. So the firm will set an
amount of capital that if they reach that point, or if it dips below that set amount, the firm will need to seek additional financing to
continue operating. The replenishment amount is based on the current capital amount on the balance sheet plus the net cash flow (in
this case it will be negative).
Financial Flexibility
The amount the firm seeks depends on the firm’s flexibility. They do not want to take on too much debt because the rate the pay would
increase, so they seek to obtain the right amount of capital to keep them operating. This is tied into the type of financing; debt or equity
offering. However, if they set the amount too low, they will need to acquire capital at a higher frequency. This is riskier than taking a
larger loan. Therefore, most firms choose to ignore their flexibility and take the larger loan, pay a higher interest rate, but not have to
deal with multiple debt or equity offerings.
Operations
The operations can keep operating at the current rate if the capital is replenished before it hits zero. Again, this is the purpose of setting
a replenishment amount that allows for enough time to fund the capital needed to continue operations.
Definition
The definition of a firm’s burn rate is an estimate of the rate of cash consumption. The burn rate is a synonymous term for negative
cash flow. It is a financial measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted,
the company will either have to find additional funding through debt or close down.
Dot-Com Era
The term burn rate became popular in the financial community around the year 2000. Companies and stock analysts started tracking
burn rate as a financial measure during the dot-com era at the peak of the internet bubble. At this time, many start-up companies went
through multiple stages of funding before emerging into profitability and positive cash flows and finally becoming self-sustainable. But
for the majority, they failed to find additional funding and sustainable business models and eventually went bankrupt. In between
capital funding, burn rate becomes an important financial management measure, since it together with the available funds provides a
time measure to when the next funding event needs to take place.
Financial Strategy
The burn rate has an impact on the financing strategy of the companies’ growth. The burn rate will impact the following details of the
financing strategy; timing, amount, type of financing and many aspects of the operations of the company. Many of the aspects that the
burn rate influences are interrelated.
Replenishment Point
The timing is based on the replenishment point for the firm. The firm cannot allow the capital to reach zero. So the firm will set an
amount of capital that if they reach that point, or if it dips below that set amount, the firm will need to seek additional financing to
continue operating. The replenishment amount is based on the current capital amount on the balance sheet plus the net cash flow (in
this case it will be negative).
Financial Flexibility
The amount the firm seeks depends on the firm’s flexibility. They do not want to take on too much debt because the rate the pay would
increase, so they seek to obtain the right amount of capital to keep them operating. This is tied into the type of financing; debt or equity
offering. However, if they set the amount too low, they will need to acquire capital at a higher frequency. This is riskier than taking a
larger loan. Therefore, most firms choose to ignore their flexibility and take the larger loan, pay a higher interest rate, but not have to
deal with multiple debt or equity offerings.
Operations
The operations can keep operating at the current rate if the capital is replenished before it hits zero. Again, this is the purpose of setting
a replenishment amount that allows for enough time to fund the capital needed to continue operations.