Glossary·Written by a CPA
Cash burn
Also called: Burn rate
How fast a company that isn't making money is using up its cash, usually measured per quarter or per month.
Cash burn is the rate a company is spending more cash than it brings in, which basically just means how fast the bank balance is going down. It usually comes up with young, unprofitable companies like biotech or early-stage tech.
The related idea is runway, which is how long the company can keep going before it runs out of cash. You get it by dividing the cash on hand by the burn rate.
For you, this matters because when the runway gets short, the company usually has to raise money, either by borrowing or by issuing new shares, and new shares mean dilution for existing shareholders.
Example. As an example, say a company has $200 million in cash and burns $50 million a quarter. Its runway is $200 million divided by $50 million, which is 4 quarters, or about a year, before it needs more money.
The catch. Companies sometimes describe their runway using planned cost cuts that haven't happened yet, so check the actual cash burn in recent quarters.
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.