Cash burn rate

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The cash burn rate (German about: money burn rate , CBR for short )

  1. the speed with which the funds are used up or
  2. the period in which a company's liquid assets are completely used up.

The aim of the CBR is to provide information on the point in time at which it is to be expected that the company will no longer be able to meet its payment obligations. A high CBR is to be interpreted in such a way that this point in time is in the distant future than with a low CBR. The meaning is thus contrary to the intuitive understanding of the term 'rate'.

Meaning and use

The burn rate is particularly important for start-up companies / start-ups of concern.

In the initial phase of the company , the company's financial resources are reduced due to the high proportion of fixed costs that are offset by only low sales .

A high cash burn rate (in the sense of a period of time) was considered an indicator of a stable company situation with solid corporate financing and was therefore particularly important in the period of the dot-com bubble , when a large number of new companies were founded. However, in the absence of the usual financial indicators that were not available in the founding phase, it was often overinterpreted. Instead of a well-financed company , the interpretation was often a good company . The neglect of "classic" company key figures (in the sense of fundamental analysis ) is one of the causes of the dot-com bubble.

example

Simplified initial situation

  • Company with € 1,000,000 starting capital.
  • In the first year, monthly running, cash costs of € 100,000.
  • monthly interest credits of € 1,000
  • Sales can only be expected after one year at the earliest.

calculation

  • Cash burn rate (1st) = € 99,000 / month (€ 100,000 / month - € 1,000 / month = € 99,000 / month)
  • Cash burn rate (2nd) = 10.1 months (1,000,000 € / 99,000 € / month = 10.1 months)

evaluation

  • The company cannot meet its capital requirements until the first significant sales are achieved.
  • Without extended corporate financing, the company will have to file for bankruptcy after 10 months.
  • Improved corporate financing would lead to an increase in the cash burn rate (2nd) (increase to € 2,000,000 start-up capital → cash burn rate increases to 20 months).

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