Understanding your run rate—a projection of future revenue based on current performance—can help you make informed business decisions. It provides the information you need to choose whether to expand your team, raise your marketing budget, or seek additional funding. It’s a simple way to gauge whether what your company does now is sustainable and scalable, and sets you up for long-term success.
Understanding run rate is one thing—knowing how to apply it is what really counts. Here’s what it is, how it’s used, and how to calculate it.
What is a run rate?
Your run rate helps you estimate your company’s future performance. It takes a short-term snapshot of your business’s current revenue data (typically a month or quarter) and extrapolates it over the course of an entire year. Here’s the formula:
Run rate = Revenue from the period × Number of periods in a year
This gives you a projected revenue figure so you can see what your annual revenue would be if the current conditions and sales remain consistent. For example, if a company generates $50,000 in monthly revenue, its annual run rate would be $600,000 ($50,000 x 12 months). This calculation helps in making a quick financial projection.
A run rate is especially valuable for companies without a full year of historical data, like a startup in its first year of operation. However, a key limitation of run rate is that its calculations can be misleading. The metric assumes a business’s performance will remain constant over time. This often proves inaccurate for businesses with seasonal revenue, competitive pressures, or rapid, unpredictable growth, for example. A run rate is therefore best used as a high-level snapshot in combination with other financial metrics.
When to use run rate
- Rapid assessment
- Evaluating performance
- Attracting investors
- Growth planning and resource allocation
- Assessing market opportunity
Using run rate as a financial metric can help you gauge your business’s future performance and adjust your budget, marketing spend, or hiring plans accordingly. Here are a few examples of where knowing your run rate can be helpful.
Rapid assessment
While run rate is useful for sales forecasting, its greatest value is for providing a quick, top-level view of a company’s performance at any given moment. This is especially valuable for new businesses or those in a period of sudden growth. It allows you to quickly assess viability without waiting for a full year of data.
Evaluating performance
Run rate helps you set benchmarks and assess the impact of recent initiatives by providing a real-time snapshot of your company’s performance. You can compare your actual performance to industry standards or past performance, and identify where you need improvement.
After introducing a new marketing campaign or sales strategy, changes in your run rate reveal how your efforts directly affect revenue and growth. For example, if you launched a product line or adjusted pricing in the first quarter, you can calculate the revenue run rate for that period and compare it to earlier data. An increase in the run rate would serve as a clear indicator of success, while a decline would signal the need for a different approach.
Attracting investors
Run rate is a powerful tool for attracting investor attention because it allows you to demonstrate scalability and future potential, even as a new business. It provides a simple, annualized projection to help investors quickly understand the health and growth trajectory of your business.
For example, a software-as-a-service (SaaS) startup with a monthly recurring revenue of $100,000 could use a projected annual run rate of $1.2 million. This demonstrates its scalable business model and may attract investor attention. This calculation provides a high-level view of the company’s potential, making it a compelling metric in a pitch.
Growth planning and resource allocation
By understanding your anticipated revenue, you can more efficiently create budgets for the upcoming year. A run rate ensures your planned spending aligns with your current income trajectory, so you can determine how much to allocate to different areas.
For example, if your run rate shows growth, you can make informed decisions about where to invest for future expansion. This might mean hiring new staff or dedicating more resources to product development.
Assessing market opportunity
You can use run rate to benchmark your company’s performance against competitors and the broader market. By comparing your projected run rate to the annual revenue or market share of your rivals, you can understand how you stack up. This provides a clear picture of your market position, which is valuable for attracting investors, justifying pricing, and making strategic decisions about where to expand.
You can use run rate to identify risks, such as seasonal trends, that could affect future growth. For example, if your run rate spikes during the holiday season but drops in the first quarter, it reveals a pattern of seasonal dependency. This insight can help you plan for slower periods by adjusting your budget or diversifying your product line.
Run rate vs. annual recurring revenue: What’s the difference?
Both run rate and annual recurring revenue are used to project a company’s annual earnings, but they’re different metrics and apply to different types of businesses.
Run rate is a versatile metric often used by businesses with unpredictable or non-recurring revenue streams, such as a consulting firm or a new product start-up. It provides a quick forecast based on a short period of time, which is useful when future sales are not guaranteed.
Annual recurring revenue (ARR) calculates recurring revenue from customer contracts. It’s typically used by subscription-based businesses with consistent, predictable revenue, such as software-as-a-service (SaaS) businesses. This metric gives investors a high degree of confidence that the revenue will be collected, as it’s based on signed contracts.
The main difference between run rate and ARR lies in the data each accounts for. ARR is based solely on recurring revenue streams and excludes one-time events, such as a large installation fee or a one-time consulting project. Run rate is a broader metric including all revenue, like one-time sales.
How to calculate run rate
- Define the period
- Gather the relevant revenue
- Exclude one-time revenue or adjust the period
- Apply the run rate formula
- Interpret the results
You can calculate run rate using a few steps:
1. Define the period
Choose a specific period for your calculation, such as a month, quarter, or half-year. This choice matters: Although a one-month period is easy to calculate, a longer period often provides more stable data and a clearer view of your business’s current performance. Be sure to use a period representative of your typical sales and not skewed by any unusual circumstances.
2. Gather the relevant revenue
Collect the total revenue generated by your business in that chosen period. The revenue based on this period is the data you use to determine your annual potential.
3. Exclude one-time revenue or adjust the period
Your run rate calculations should exclude any large one-time sales or unusual events that are not part of your regular, predictable income. An example of this may be a single large custom order, or a one-time pop-up you participated in. Including these can artificially inflate your projected revenue and give you a misleading picture of your company’s revenue potential. This can be accomplished in two ways:
First, you can simply exclude the revenue. Subtract the value of the one-time sale from the short-term revenue figure you are using for your calculation. Alternatively, you can select a different, recent time frame that’s free from these unusual events to ensure your calculation is based on typical performance.
For instance, if your company received a large, one-time consulting fee this month, your most accurate run rate would be calculated from the previous 30-day period. However, if that is not possible, you can still use the current month but subtract the one-time fee before performing the calculation.
4. Apply the run rate formula
Use the run rate formula to scale your period’s revenue up to a full year. The calculation is as follows:
Run rate = Revenue from the short-term period × Number of these periods in a year
For example, if you use your monthly revenue of $10,000, the revenue run rate calculation would be:
$10,000 × 12 = $120,000
If you use your quarterly revenue of $30,000, the calculation is:
$30,000 × 4 = $120,000
5. Interpret the results
With your run rate, you have an estimate of what your annual earnings can be if your business continues to perform at the same level. This figure is an estimate of your company’s revenue potential under current conditions, and can be used to make informed business decisions.
For example, if your target annual revenue is $1 million but your current run rate is only $750,000, you have a clear indicator that you need to adjust your strategy. This insight could lead you to increase your marketing spend, re-evaluate your pricing strategy, or launch a new sales initiative to get back on track.
Run rate FAQ
How do you calculate a run rate?
To calculate a run rate, take the total revenue from a recent period, such as a month or a quarter, and multiply it the number of equivalent periods in a year to get a full-year figure. For example, if your monthly revenue is $5,000, your annual run rate would be $60,000 ($5,000 × 12).
What is the meaning of run rate?
A run rate is a projection of a company’s annual earnings based on its most recent revenue data. It used to quickly estimate future performance and revenue growth, assuming the current performance continues at the same level for the entire year.
What are the main benefits and drawbacks of using run rate?
A main benefit of the run rate is its simplicity and ability to give a quick, forward-looking view of your business’s financial health. This is especially helpful for high growth companies needing to make decisions quickly.
A major drawback is that run rate calculations can be misleading. They’re based on the assumption that your business’s performance will remain constant, which is rarely the case. For example, seasonal businesses or companies facing competitive pressures will have significant fluctuations in revenue and future earnings. The metric also doesn’t account for important factors like customer churn or new profit centers, so it’s best to use run rate in conjunction with other financial metrics to get a more accurate picture.
