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 is coming soon)
Overview of the Burn Rate Financial Measure
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.