Revenue run rate, or sales run rate, is a financial metric that projects current revenue in a given period over a future period of time to give businesses a baseline understanding of future earnings. Companies can use weekly, monthly, or quarterly revenue data to extrapolate their annual income and inform strategic planning.
What is Revenue Run Rate?
Revenue Run Rate is an indicator of financial performance that takes a company’s current revenue in a certain period (a week, month, quarter, etc.) and converts it to an annual figure to get the full-year equivalent. This metric is often used by rapidly growing companies, as data that’s even a few months old can understate the current size of the company. Another term for this is the Sales Run Rate.
In general, the run rate uses the current financial information, such as present sales and present revenue, to forecast performance. As it extrapolates the current financial information and performance there is an implied assumption that the present financial environment will not change significantly in the future.
Revenue Run Rate Formula
Run Rate = Revenue in Period / # of Days in Period x 365
The Revenue Run Rate takes information on present financial performance and extends it over a longer time period. Consider the following example: Company XYZ generates revenue of $5 million in the first quarter of 2017. The company’s president wants to find out how much revenue his company is likely to generate for the rest of the year if conditions don’t change. He can use the Revenue Run Rate for this purpose. In this case, Company XYZ is operating at a Revenue Run Rate of $20 million a year.
When a company uses the data currently available to make projections about future financial performance for the whole year, the company is said to annualize the data. The above example is a case of the annualization of data.
The benefits of calculating run rate
Estimated earnings- Run rate calculations are an easy and fast method for gauging your company’s current and future financial health, assuming that sales continue along the same trajectory.
Estimate future growth- Having an idea of your company’s annual revenue run rate helps you predict your future cash flow needs.
Project future savings-You can use the revenue run rate to predict how well you expect to do for the following year. For instance, you can determine how much you will save and whether you can afford to make capital improvements or purchase new manufacturing equipment.
Make smart budgeting decisions- Understanding your revenue run rate helps you allocate a budget where necessary. For instance, if your revenue run rate predictions fall short of the past years, you can find ways to minimize expenses and boost sales.
Manage inventory – Accurate run rate calculations can help you manage your inventory better by ensuring you don’t overstock or run out of merchandise every other month.
Provides a benchmark for your company- You can use the revenue run rate benchmark to track your company’s progress and compare it to SaaS averages.
Why Do Companies Use Revenue Run Rate?
Revenue Run Rate can be a very helpful indicator of financial performance for a young company that has only been in business for a short period of time. Revenue Run Rate can be an especially powerful tool if the company is relatively sure that the financial environment won’t change drastically.
The Risk of Using the Revenue Run Rate
1 Changes in the environment- The Revenue Run Rate, like all Run Rate figures, makes the critical and often unrealistic assumption that the financial environment will remain relatively unchanged in the future. The modern financial market is extremely unpredictable and fickle and making financial decisions solely on the basis of Run Rate type figures would be extremely foolish.
2 Seasonality- In addition, even if we discount the threat of sudden changes to the financial environment, the Revenue Run Rate and other Run Rate type figures can be very deceiving.
Consider the case of seasonal industries. Retailers experience a massive rise in both Revenue and Profits in the month of December due to the winter holiday season.
If retailers such as Walmart and Target use the revenue and profit figures from this period to construct Revenue Run Rates or Profit Run Rates, then their estimates would be greatly inflated. On the other hand, if they calculated their Revenue Run Rate during a slower season of the year, not factoring in the Christmas rush would produce deceptively low figures.
3 Changes in company performance- Revenue Run Rate and other run rate type figures are usually constructed based on the most recent available data and often do not account for events that could have caused a change in the financial performance of the company at a specific point in time.
For example, technology firms such as Microsoft, Sony, and Apple tend to experience a rise in sales and revenue whenever they release a new product.
How Revenue Run Rate and Annual Recurring Revenue (ARR) Are Different
Since the revenue run rate is an annualized revenue projection, it is often confused with the annual recurring revenue (ARR). But they are different metrics.
The annual recurring revenue (ARR) is the total annual contract value (ACV) of subscriptions in a SaaS business. In other words, it only accounts for revenue you can reasonably assume due to customer contracts. ARR is more commonly used than revenue run rate since it is a more stable predictor of revenue.
However, ARR can’t show the complete picture of your revenue since it excludes one-time purchases and fees. So it is usually only used by companies with a subscription model.
Businesses often use ARR to show growth rate over time by comparing each year’s recurring revenue.
| Annual revenue based bookings from subscription sales. | Projecting future revenue for non-annual contracts or non-subscription revenue streams. | Any business and business model can use the revenue run rate metric. | |
| Annual revenue based bookings from subscription sales. | Gauging the top-line health of the business and forecasting revenue. | ARR only applies to SaaS businesses due to subscription models. |
Revenue run rate FAQs
How is revenue run rate different from ARR?
Revenue run rate (RRR) and annual recurring revenue (ARR) are different in that ARR includes only recurring revenue while RRR includes any revenue. ARR is used for subscription-based purchases during a period of time and does not include one-time purchases.
What is the annual run rate?
The annual run rate is used to roughly estimate a company’s annual revenue based on existing monthly or quarterly data. You can use the annual run rate to predict the future of any business, calculate the annual burn rate, and prepare for future demand. Future prediction and annual burn rate calculations can help you determine the amount of inventory you need to hold or how many sales reps to hire for your SaaS company.
What is run rate EBITDA?
Run rate analysis is highly subjective and requires incorporating disclaimer whenever you produce run-rate calculations within your M&A reports. In some of your M&A reports, you may request the buyer to make a bid based on the EBITDA run rate instead of the adjusted EBITDA figure based on actual results. This happens when the adjusted EBITDA does not incorporate a full year of value for new customer contracts
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