Cash Burn

The rate at which a company uses up its cash reserves to cover operating expenses and capital expenditures before generating positive cash flow.

Cash burn represents the rate at which a company consumes its cash balance, typically measured on a monthly or quarterly basis. It is a critical metric for early-stage, high-growth, or capital-intensive companies that are not yet generating positive free cash flow. When a company's cash burn is too high, it must continuously raise capital through debt or equity issuance to avoid insolvency. For investors, monitoring cash burn is vital to understanding a company's "runway"—the amount of time it can survive before needing fresh capital. A sudden increase in cash burn, especially without a corresponding acceleration in revenue growth, often signals operational inefficiencies or aggressive, unproven capital spending, which can lead to severe stock dilution or financial distress. To calculate cash burn, investors look at the cash flow statement. Free cash flow is the most common proxy, as it combines operating cash outflows with capital expenditures. A high cash burn rate is acceptable if it is driving rapid scale and market share, but it becomes a major risk factor if capital markets tighten and refinancing options disappear.

Company A has $50,000,000 in cash on its balance sheet. Over a 3-month quarter, its cash balance drops to $35,000,000 due to operating expenses and equipment purchases. Its quarterly cash burn is $50,000,000 - $35,000,000 = $15,000,000, which translates to a monthly cash burn rate of $15,000,000 / 3 = $5,000,000.