Sometimes referred to as annual run rate or annual revenue run rate, a revenue run rate is a forecasting method enabling you to make predictions surrounding the financial performance of your SaaS company over the coming year, based on past earnings data.
Completing a revenue run rate calculation is relatively straightforward, assuming that you have access to several months’ worth of revenue data. Take your revenue over a specific period – usually a month – and multiply it by 12 to find the annual revenue run rate.
What are revenue run rates used for?
Revenue run rates can be an excellent way to create performance estimates for businesses that have been operating for a short amount of time. It’s an especially useful tool for rapidly expanding subscription-based companies.
Revenue run rate can also be a helpful benchmark metric to use when evaluating internal company initiatives (launching a new product line or restructuring a department). If your annual revenue run rate has increased after making changes to the structure of your company, it might indicate that whatever you’ve done is working. By contrast, if the revenue run rate has declined, you may need to go back to the drawing board.
Benefits of revenue run rates
- Estimate future growth: Having an idea of your company’s annual revenue run rate helps you predict your future cash flow needs
- Estimated earnings: Run rate calculations are a quick and easy method for gauging your company’s current and future financial health, assuming that sales continue along the same trajectory
- 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 year’s, you can find ways to minimise expenses and boost sales
- 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
- Manage inventory: Accurate calculations can help you to better manage your inventory by ensuring you don’t over or understock.
- Provides a benchmark for your company: You can use the revenue run rate benchmark to track your company’s progress and compare it to the average within the market.