How Run Rate is a Valuable Metric for Successful Business Owners

At some point during the year, you’ll probably look at your monthly or quarterly performance and wonder what your year-end performance will look like.

This type of analysis is called run rate, and it’s a simple forecasting metric. Knowing your run rate can help you make business decisions based on your current performance. 

However, run rate is only valuable if you give it context. As a straight calculation, it can be misleading and ignore your growth potential or factors that may decrease your revenue in future months.

If you know how to calculate run rate and how to account for different scenarios, you can use run rate as you plan and budget for future months.

‍

What Is Run Rate and How Is It Calculated?

Run rate takes your current revenue and extrapolates it over a longer period of time. The calculation is very straightforward:

• Monthly revenue x 12

-or-

• Quarterly revenue x 4

Let’s say your business is earning $50,000 per month. Your annual run rate would be $600,000. This data can then be used to create an annual projection based on your current performance.

You can calculate your run rate based on other time periods. If you have revenue over 45 days, for example, you would use this formula:

• Revenue / 45 x 365

You’d divide the total revenue by the number of days to get a daily revenue amount, and then multiply by 365 to get your run rate.

‍

Why Run Rate Matters for Business Owners

Run rate can be really helpful for businesses that have been operating for short periods of time, that may not yet have historical financial data to rely on. It’s also commonly used in subscription-based businesses, e-commerce and retail companies, and professional services businesses.

Run rate is also useful when you’ve had a fundamental change in your business operations or strategy. After all, you never quite know how a new product, service, or other changes will impact your revenue until the numbers roll in. 

Using the run rate, your current financial performance can help you anticipate future financial performance for the rest of the year. Since run rate projects your annual revenue, it can aid you in budgeting — particularly if you need additional resources to support a product or operational change.

If you’re looking to raise funding, run rate can be an important metric to provide to potential investors. You can even use benchmarking data to compare your run rate with competitors or industry standards.

‍

Limitations of Run Rate Analysis 

Some businesses do complex analyses to project their annual income, based on past years, trends, and other factors. Run rate, by contrast, is appealing to many businesses because it’s such a simple calculation. 

However, your actual data might have more nuance that doesn’t make sense in an annual calculation. 

Here are a few factors that might skew your run rate.

‍

Seasonality 

If your time period (one month, one quarter, etc.) includes seasonal income, your run rate would be overstated (or understated, depending on the time period you’re using). Run rate is only an effective calculation when the months you use reflect your average or expected income in subsequent months.

‍

Industry or Economic Changes

Run rate can’t account for changes outside of your control. A supply change disruption due to a product shortage, for example, could impact your revenue. In the U.S., changes in tariffs might also impact a business by adding additional expenses that would decrease revenue. 

‍

Growth 

When you’ve introduced a new product, service, or pricing, run rate might not accurately project your revenue for subsequent months. You don’t know that your revenue will continue to increase at the same rate. You might experience acceleration or deceleration in your growth, particularly if you add additional resources. 

‍

Best Practices for Run Rate Analysis

Run rate can be a valuable metric for business owners, if you keep the limitations in mind. Here are a few things to keep in mind if you use run rate when analyzing your finances.

Use run rate as a starting point. Combine it with other metrics, such as your cash flow and ARR, to get a more complete picture. You may have a strong run rate, but struggle with cash flow, which could indicate that you need to make other changes in the business.

Recalculate your run rate periodically. When you do this, you capture changes that are impacting your revenue, such as an increased/decreased growth rate or industry/economic conditions. 

Keep your run rate in context. Understand your business cycles (such as seasonality) and other factors that influence your revenue within a particular period (such as an out-of-the-ordinary sale or loss). You should exclude large, one-time events from your run rate analysis. 

‍

Incorporate Run Rate into Your Financial Planning

Run rate can be an incredibly useful metric, but you can increase its value if you incorporate different scenarios in your financial planning.

By developing multiple run rate scenarios (conservative, moderate, and aggressive), you can better prepare for different outcomes. If economic conditions start to impact your business, you know that your run rate should be more conservative. If your new product or service starts to gain momentum, then you can look at the run rate that shows more aggressive growth.

By calculating different run rate scenarios, you can plan and budget the upcoming months in your business. For example, you may plan for upcoming expenses later in the year, but only if your run rate continues on a moderate or aggressive path. 

Adjust your planning as needed as new financial data becomes available. The right revenue forecasting is critical for your overall business — and run rate is one metric (of many) you can consider. 

Flex helps businesses with expense management, so you can make smarter decisions and scale your business.