What Is Revenue Run Rate?
As a business owner, you understand the importance of revenue projections. One of the best ways to estimate the amount of revenue your SaaS company is expected to generate over the next 12 months is a revenue run rate calculation. Find out everything you need to know about annual revenue run rate with our comprehensive guide. Lets kick off the discussion with our revenue run rate definition. Revenue run rate  sometimes referred to as annual run rate or annual revenue run rate  is a forecasting method that enables you to predict the financial performance of your SaaS company over the coming year based on past earnings data. Lets explore how it works. How to do a revenue run rate calculation  Completing a revenue run rate calculation is relatively easy, assuming that you have access to several months of revenue data. Essentially, youll need to take your revenue over a specific period (for example, one month) and multiply it by 12 to find your annual revenue run rate. This revenue run rate calculation can be expressed in a formula:  Annual Revenue Run Rate = Revenue in Period x No. of Periods in One Year  Lets see an example of how annual revenue run rates work in practice. Imagine that an expanding business posted revenues of $150,000 in March. To calculate their annual revenue run rate, youll simply need to multiply this figure by 12:  Annual Revenue Run Rate = $150,000 x 12 = $1,800,000  The company may also choose to look at revenues from a more extended period to work out its revenue run rate. For example, if they made $110,000 in January and $120,000 in February, they can use this quarterly sales data to forecast their revenue run rate:  Annual Revenue Run Rate = $380,000 ($110,000 + $120,0000 + $150,000) x 4 = $,520,000  This highlights one of the potential issues associated with revenue run rate as a forecasting method  your data can change so rapidly that your estimates may become out of date. Firstly, revenue run rate can be an excellent way to create performance estimates for businesses that have only been operating for a short amount of time. As such, its an especially useful tool for rapidly expanding subscription companies. Revenue run rate can also be a helpful benchmark metric to use when evaluating internal company initiatives, i.e., 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 may indicate that whatever youve done is working. By contrast, if your revenue run rate has declined, you may need to go back to the drawing board. The limitations of revenue run rate  Its also important to remember that revenue run rate calculations Have several limitations. As we mentioned earlier, your sales data can change rapidly, which means that in some cases, revenue run rate simply isnt going to be an effective way to forecast financial performance. Plus, there are lots of different things that the revenue run rate doesnt account for, such as churn, which can dramatically affect the amount of revenue your business generates. Furthermore, revenue run rate is particularly ineffective for seasonal businesses, while one-time sales and expiring contracts can heavily skew your monthly/quarterly sales figures, throwing off your revenue run rate calculations. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.