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Defensive Interval Or Burn Rate Ratio

Normally, defensive internal or burn rate ratio is quite crucial to a start up company like the internet business.Most of the time, the start up companies are funded by venture capitalist. Their products might still need a lot of development before reaching the marketability state.  

Here, this interesting liquidity ratio, the defensive interval is able to reflect theoretically how long the company can survive or defend itself in terms of its available cash plus cash equivalent ( most liquid cash) versus its daily cash operating requirement.

Tabulate below some salient points on Defensive Interval or some called Burn Rate Ratio:

Ratio

 Purpose Formula
 Defensive ratio  ·   Used to indicate the number of days a company could theoretically remain in business without additional sales or new loans ( financing) Average daily cash expenditure for operating expenses                         ————————–Company’s most liquid assets 
Note: Most liquid assets =cash + cash equivalents
Illustration: ABC Ltd:

Annual operating expenses = $365,000 per annum 

Current cash & cash equivalents as follows:

 Cash                                                         60,000

Fixed deposits less than three months        140.000   

Marketable securities                                 100,000 

                                                                300,000

Defensive ratio/Burn Rate Ratio

=Average daily cash operating expenses/ Most liquid assets

=$365,000/365=$1,000/365 

Daily operating expenses

 = Annual operating expenses/365 days

=$365,000/365

=$1,000,00 

Defensive Interval

= Average =$300,000/$1,000=300 days
 Interpretation: 

  • What it means is that ABC Ltd can continue to be in business without any trade-related activity (additional sales) or new funding (new loans) for 300 days. 

This entry was posted on Friday, November 2nd, 2007 at 4:17 am and is filed under d. Interpretation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Defensive Interval Or Burn Rate Ratio”

  1. Snapshot Of Articles Covered Under The Interpretation Of The Financial Statements | MBA Accounting Says:
    May 5th, 2008 at 8:56 pm

    […] Financial Ratio Analysis- The Defensive Interval Ratio […]

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