Understanding the run rate revenue of your business is crucial to making good decisions. Run rate tells you how much money you’ll make in the future if your current business plan continues unchanged. It’s calculated by dividing the current period’s revenue by the current period’s period length. It can be used to predict a company’s cash flow, as well as its ability to repay debt.
You may also hear it referred to as a “rolling average,” which means that the numbers are updated with each new period of data, and it doesn’t need to happen all at once. If your business is looking for some help with managing their revenues, here are some tips on how to calculate the run rate and what this number will do for your business.
What is the run rate revenue?
Run rate revenue is a key number to assess how profitable a business is. You may be working with different numbers, depending on your business’s goals. But at the heart of it, it’s all about how many months it takes to turn a profit on your products, services or assets. It tells you how many more sales you need to do to make a profit. In simple terms, if your revenue run rate is $500,000, you need to sell at least $4,000 more each month to get to your full potential. The better the run-rate number, the more the business can afford to expand its operations, or simply be more productive with its current operations.
What does revenue run rate tell you?
Run-rate is a financial forecast of your revenue and expenses, as well as your growth, for a given future period. If you’d like to know what your run-rate is, simply divide your current period’s revenue by your current period’s period length to get the result. The process is a little more complicated than that, but it’s actually much easier than it seems.
To calculate your revenue run rate, use this formula: (YOY) Revenue / (PTL) Revenue. In this formula, YOY represents the annual growth of your company’s revenue in the previous period and PTL is the average revenue from the previous periods.
Estimating your run rate revenue
Estimating revenue run rate is a critical piece of the process of determining if a business is on track to reach its ultimate goals. This method of calculation is known as a “multi-variable approach,” and the following variables need to be considered:
First, you’ll need to get financial statements from your bank or lending institution. You can do this online. If you have any debt, see if you can pay it down or borrow against equity that’s available to you. Work out your monthly expenses and net income, including interest paid and deductions like depreciation. Assume you’ll sell an item for its cost in a year from now. Add the same amount of money into the next month, then increase it by the amount of additional revenue you think you’ll earn in the next year.
How to use the revenue run rate for your business?
In order to calculate your revenue run-rate, first you need to know what you’ll be making in the next 12 months. If your business is a service-based business, you’ll want to focus on the fixed costs in that specific product or service.
For example, if you make custom golf clubs and you’re not able to predict how many clubs your customers are going to want, it’s difficult to put any significant amount of effort into how to make your product right. It would be very difficult for your company to recoup the costs for the year since your sales are flat. On the other hand, if your business is a retail company, then your fixed costs are extremely easy to predict.
Conclusion
The revenue run rate will help you make important decisions about your business. If you are struggling to make some important decisions about your business, then use revenue run rate as a simple guide to get an overall sense of your business’ financial status.