A company’s burn rate refers to its negative cash flow. If a company has a negative cash flow, it is using up its capital provided by shareholders in order to pay for its overhead. Once the shareholder capital is used up, the company faces three choices:

- Make a profit from operations

- Find another cash infusion

- Go out of business

The burn rate is often measured on a monthly basis and designates how much the company is spending per month. If the burn rate (spending) is greater than company income, the company may take steps to reduce the burn rate. Usually, these steps involve staffing reductions.

Burn rate has implications for investors. If a company is burning cash at a fast rate over a long period of time, investors need to question whether the company can remain in business. Companies with high burn rates may be tapping stockholder equity, and they may also be borrowing capital. If such a company looks for new investment capital at this time, investors should research carefully and be fully aware of the company’s burn rate before making a decision to invest.

Large burn rate is often a characteristic of new companies that need to establish growth and stability. Such companies may need to tap investor equity or other funding before these companies are able to generate enough revenue to exceed expenses. Startup expenses may also be high.

Sometimes, however, well-established companies can begin to experience a high burn rate. An article at http://www.247wallst.com describes how several large, mainstream companies struggled with a fast burn rate during the recession of 2008 and 2009.

A slow burn rate can also have disadvantages for a company. For example, it may mean that the company is not spending enough money to innovate, capture market share, or keep up with the competition.