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.
Why you should track your revenue run rate
- Easily estimate your annual recurring revenue – You can use run rate (while accounting for other SaaS metric base rates) to quickly predict your company’s annual recurring revenue (ARR).
- Helps investors quickly estimate your growth and top line – Your revenue run rate helps you place growth in context by comparing previous run rates to the current run rate.
- Offers a starting point for capacity planning – You can use the revenue run rate to predict your company’s ARR as explained above. Your predicted ARR can then be used to plan the capacity you will need to achieve your revenue goals and fulfill customer expectations.
Simplifies continuous planning – Run rate is easy to calculate regularly, making it a very useful metric for a SaaS company’s continuous planning efforts. Using the revenue run rate to measure how growth affects revenue forecasts can help you adjust your business plans and revenue goals on a rolling basis.
How to calculate the revenue run rate
Revenue Run Rate = Total Revenue during the most current Time Period * the number of those Time Periods in one year
Example of a revenue run rate calculation
You can calculate revenue run rate using different time periods, including weeks, months, and quarters. Here’s a simple example of calculating a company’s revenue run rate using two different periods:
the calculations using different time periods produced different results. This is because the revenue run rate is heavily influenced by any revenue trends during the base period used for the calculation. Generally, the longer the time period, the more those trends tend to smooth out.
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. |
Drawbacks to using the revenue run rate
The revenue run rate isn’t always the most accurate metric for revenue forecasting because it’s based solely on historical data. Some of the drawbacks that make revenue run rate risky to use are that it:
- Does not account for seasonality – Monthly and quarterly sales revenue can differ greatly when measured during the high season compared to the low season. Revenue run rate calculations for the same company will vary depending on the time of year in which they are made.
- Does not account for churn – Churn occurs when customers do not renew subscriptions. Churn rates will reduce your ARR should more customers stop using your services compared to those who sign up. The revenue run rate assumes growth will be constant, which could result in major discrepancies between the run rate and actual revenue captured.
- Can present unrealistic numbers in tough economic conditions – Revenue run rate cannot anticipate major economic shifts in a turbulent business climate. If sales drop due to an external factor like a recession, the run rate won’t account for that.
- Assumes capacity remains the same – Run rate assumes your capacity will remain the same. However, you might remodel your capacity based on metrics like the Q factor. Revenue run rates are based on revenue data that is current at the time they are calculated and cannot account for changes not yet made at that time.
- Does not account for one-time revenue windfalls – A significant one-time sale during the period you use to calculate the revenue run rate will skew projections for the entire year resulting in a result that is artificially inflated and thus inaccurate.
- Does not account for new business ARR – Your company may be about to introduce a new product or service that will boost sales and revenue. The revenue run rate can’t account for this future increase and its predictions may fall short of real revenue growth.
When to use the revenue run rate
- When you’re trying to secure funding for a new company – If you haven’t been in business long enough to use alternative metrics, and given the market is stable, the revenue run rate can offer investors a quick picture of your growth prospects.
- When you are changing strategies – When switching growth strategies, you can use the revenue run rate as a benchmark to gauge whether your changes are working and whether your new plan is feasible. For example, if you’ve restructured your sales team and you see an increase in your revenue run rate, you can be fairly certain your strategy is working to boost your revenue.
- When you want to provide quick insights to your sales and GTM teams – Run rate is an easy metric that sales and GTM teams can use to assess whether their efforts are in line to meet their revenue quotas and targets.
FAQs
What is the run rate of a company?
Revenue run rate is a method used to predict your company’s future annual revenue based on past earnings within a specific period.
Why should you track the revenue run rate?
- Easily estimating annual recurring revenue
- Helping investors estimate your growth and top line
- Comparing year-on-year run rate change to assess growth
- Offering a starting point for planning capacity
Is revenue run rate the same as ARR?
No, the run rate is based on the total revenue a company earns from all its income sources. ARR only includes revenue from SaaS subscriptions.
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