Term · Cash Flow & Working Capital
Burn rate
In briefThe burn rate shows how much liquidity a company consumes per period; net burn captures the net outflow from the business excluding new financing. For not-yet-profitable small caps it directly determines how long the available funds will last.
Definition
The burn rate measures a company's periodic cash consumption. Gross burn considers operating cash outflows, net burn the net outflow after cash inflows from the business, but in principle excluding new financing.
How it is calculated
Formula. Net burn is typically = negative operating cash flow, i.e. net operating cash consumption per month or quarter. Report financing cash flows separately.
Why it matters for small caps
For pre-profit small caps it directly determines the remaining financing runway until the next capital measure.
Common misreadings
- The mere change in the cash balance can be distorted by capital increases, loans, acquisitions or currency effects.
In the process
Frequently asked
What is the burn rate?
It describes the periodic cash consumption per month or quarter. Gross burn considers the outflows, net burn the outflow after cash inflows from ongoing operations.
How do you derive the runway from the burn rate?
You divide the available cash balance by the net burn per period and obtain the remaining financing runway. From this you can estimate when a new capital measure will be needed.
What distortion is common with the burn rate?
The pure change in the cash balance can be distorted by capital increases, loans, acquisitions or currency effects. Financing flows should be considered separately from operating consumption.
Related terms
Sources
Primary
IFRS Foundation – IAS 7 Statement of Cash Flows
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows.html/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.