Businesses require a certain amount of capital for operations. Understanding how to manage this capital helps to ensure the long-term viability of the company, and a company must manage this reserve carefully. To this end, a company must monitor expenditures and use capital funds for operational expenses only until the company can generate new revenue. Interval measure is a financial ratio used by organizations to estimate how long the business can operate with the money or capital on hand.
The interval measure provides information about how many days a company will can continue to operate using the funds it has on hand. Having this information helps an organization understand its ability to meet and continue obligations in the future. An organization can calculate its interval measure by dividing the average daily operating expenses by current assets minus inventory. The result is the number of days the company can continue to use its assets to meet its expenses.
You can also use the interval measure to calculate the burn rate of the organization. The burn rates most common application is to measure the capital generated during the startup of an organization. The burn rate is the money required by the organization every month to support operations and run the business. The burn rate, however, does not take into account the many difficulties that the organization might encounter running the business.
If unforeseen problems do occur, the organization will have a more difficult time accurately measuring the rate at which the business depletes its cash. The interval ratio and the burn rate can only give the organization a rough estimate without accounting for the numerous problems the organization might encounter. Investors and venture capitalists also commonly use these ratios to estimate what it will cost to run a business or decide whether the business has sufficient cash to continue operations.
The interval measure gives the organization a tool that can help to control expenses. One way for a business to ensure it will have the required capital to continue operations is not to exceed the results of the interval measure analysis. If the business encounters problems that require unforeseen expenditures, the business should implement cost-cutting measures from other departments within the organization to avoid reducing the number of days the business can continue to operate with the funds on hand.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
- IndianMBA.com: Financial Analysis for the Non-Finance Executives; D. Aruna Kumar