What it means
To find the run rate, you take revenue from a short period, such as a month or a quarter, and multiply it by the number of such periods in a year. If a company earned $250,000 last month, its annualised run rate is 12 times that amount.
Some businesses use a trailing three-month average to smooth out the swings. Start-ups and fast-growing companies use the measure because their last full year understates what they are now doing.
A business that grew from nothing in January and reached strong sales by December may have small yearly revenue but a large run rate. Investors and boards like the figure because it is simple, but they also treat it carefully.
It assumes that the recent period is typical, and that assumption fails when sales are seasonal, when there was a one-off deal, or when growth is slowing. The most reliable run rates are based on recurring revenue, such as subscriptions, because the income continues without new sales effort.
Contracts that end soon should be removed from the calculation. The term annual recurring revenue (ARR) is often used for this, and it is stricter than a general run rate that may include one-time fees.
A run rate is not the same as a budget or a forecast. A forecast models how the numbers will change over the year, whereas a run rate simply freezes the recent pace and extends it.
When quoting a run rate, say which period it is based on and what was included. A figure based on the best month of the year is much less reliable than one based on an average of several months.
In practice
Real-world examples
Example 1
A software start-up reports $90,000 of subscription revenue in its latest month. Its run rate is 90,000 x 12 = $1,080,000. The founder uses this figure in a pitch to investors, noting that it is based on recurring subscriptions only. She also shows the month-by-month trend so that investors can see the growth behind it.
Example 2
A garden centre sells $400,000 in May, its busiest month. A quick run-rate calculation of 400,000 x 12 = $4,800,000 would greatly overstate the year. The owner uses last year's full-year total of $2,900,000 as a more realistic guide. He plans staffing on that basis.
Example 3
A consulting firm completes a one-off project worth $300,000 in one quarter, on top of $500,000 of normal revenue. Using the quarter's total of $800,000 would give a run rate of $3,200,000. Excluding the one-off project gives 500,000 x 4 = $2,000,000, which is the better picture.
Think of it
Imagine driving your car at sixty miles per hour for just one minute. If you multiply that speed to predict your distance over an hour, you get sixty miles. That is your speed run rate, but it only works if you do not hit traffic jams, red lights, or stop for fuel.
Formula
Calculation
Revenue run rate = Revenue for the period x Number of such periods in a year
Suppose a company earned $250,000 in March. The monthly run rate is 250,000 x 12 = $3,000,000. If instead it earned $700,000 over the whole first quarter, the quarterly run rate is 700,000 x 4 = $2,800,000. The two figures differ because March was a stronger month than the quarter average, which is why the base period should always be stated.Case study
Seen in the real world
Skyline Analytics is an illustrative, fictional software firm that told lenders its revenue run rate was $6,000,000 after a record month. The figure came from December revenue of $500,000, multiplied by 12.
A lender's analyst noticed that $120,000 of December revenue came from one-off set-up fees, and that renewals were concentrated in the last month of the year. Using recurring revenue only, the monthly figure was $380,000, which gives a run rate of 380,000 x 12 = $4,560,000.
Skyline accepted the lower number and agreed a smaller loan with a lower repayment. In this illustrative story, the company's credibility improved because it later reported results that matched the more careful estimate. The lender also asked for monthly reporting of recurring revenue.
Watch out
Common mistakes
- Annualising a record month, which assumes every month will be as good as the best one.
- Including one-off fees or projects in the base period, which overstates ongoing income.
- Calling a run rate a forecast, when it simply extends the recent pace and ignores growth, churn and seasonality.
Questions
People also ask
How is run rate different from ARR?
ARR counts only contracted recurring revenue, while a general run rate may include any revenue earned in the period.
Can a run rate be used for a seasonal business?
Only with care, since a peak month will overstate the year and a quiet month will understate it, so an average over a full cycle is better.
Which period should I use for a run rate?
Use the shortest period that is still typical, and state it clearly so readers can judge the figure. A three-month average is a good compromise for most businesses.