Question

A firm usually fails if it burns through all of its capital before it becomes profitable Discuss the merits or demerits of this statement to the best of your understanding based on the chapter subject matter. Provide practical examples in your response posts.

Answer 1

Capital is an important factor that determines the profitability of the firms.If a firms burns out all its capital before attaining profits the firms will incur heavy losses.The proper utilization and management of the capital is very important for the financial health of the firms and the proper management of capital will help in the proper balance between the profitability,liquidity and growth of the firms.Without sufficient capital the profitability and growth will be unattainable for the firms.The burn rate of capital refers to the rate of venture capital used up by the firms before it generates a positive cash flow or profitability.Burn rate of capital implies negative cashflow for the firms or in simple terms burn rate represents the rate at which the company or firms loses their money.If the burn rate of the firm is too fast they will have more risk of running out of the business.At the same time if the firms don't burn out enough capital the firms will not have enough investments and it may fall behind.Thus an optimal amount of burn rate of capital or cash is required for the firms to sustain but if the burn rate of capital is too fast the firms will fail to earn profits.Some of the real examples are United Airlines faced the crisis due to a daily burn rate of more than 7million and led to bankruptcy.