Burn rate

Burn rate refers to negative cash flow. This term is usually employed in venture investment or when starting up new companies. When a new company is created, the trend is for it to spend more money than it earns.

Indeed, for a time, a new company might not even make that much money. The rate at which this company uses up the capital while it reaches the point wherein it makes profit is what is called the burn rate. If the burn rate of a company is too high, the capital will be depleted very quickly. At this point, the company has three options: make a profit, get more capital one way or another, or go under.

The term burn rate is fairly new. It became part of the mainstream during the 1990s dot-com era, when Internet companies experienced a boom. Many of these companies quickly depleted their capital before making any profit, forcing them to either close down or source more funds. Indeed, a lot of these companies had to go through several stages of acquiring additional capital before becoming profitable in their own right.

Much like other financial terms used for corporations, burn rate can also be applied to personal finance. In this case, it refers to how fast an individual spends his discretionary income (money left after taxes and essential expenses).