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. Let’s kick off the discussion with our revenue run rate definition.
What is Revenue run rate?
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. Let’s 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, you’ll 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
Let’s 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, you’ll 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 = £1,520,000
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with revenue run rate as a forecasting method – your data can change so rapidly that your estimates may become out of date.
What are the uses of revenue run rate?
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, it’s 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 you’ve 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
It’s 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 isn’t going to be an effective way to forecast financial performance. Plus, there are lots of different things that the revenue run rate doesn’t 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.
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