What is Revenue Run Rate? Breaking Down the Best Proxy for Annual Revenue

The revenue run rate (also called annual run rate) is a proxy used by SaaS companies to estimate annual revenue.

 

It is an indicator of financial performance that takes a companyโ€™s current revenue in a certain period (a week, month, quarter, etc.) and converts it to an annual figure to estimate the full-year equivalent.  

 

This forecasting method is often used by rapidly growing companies, as past data thatโ€™s even a few months old can understate the current size of the company.

 

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Revenue run rate - Confluence.VC

What is revenue run rate in SaaS?

Revenue run rate in SaaS (Software-as-a-Service) is a metric used to measure the amount of revenue generated by a company over a period of time. This metric is calculated using current financial information such as existing revenue and subscription fees.

 

The run rate is an estimate of a companyโ€™s annual revenue and can be used to create forecasts or predict future financial performance.

 

 

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Why does revenue run rate matter?

The revenue run rate is an important metric for SaaS companies as it provides insight into future performance and helps predict the success of their business.

 

It can be used as a benchmark to compare the performance of different SaaS companies to see if their go to market strategy is working and also identify areas of improvement.

 

How to calculate run rate

Run rate can be a fairly easy metric to calculate, once a few months of revenue data is in hand.

 

Take your current revenue over a certain time period, either use monthly or quarterly. If monthly, multiply that by 12 (to get a yearโ€™s worth of revenue). If quarterly, multiply that by 4. If you made $10,000 in revenue for each month, your annual run rate would be $10,000 x 12, or $120,000. If you made $30,000 each quarter, your run rate would be $30,000 x 4 or $120,000.

 

Example of revenue run rate

Company XYZ is a fast growing company. 

 

Itโ€™s March, and Company XYZ posted revenues of $30,000 for the month. To get their annual run rate, Company A multiplies Marchโ€™s monthly revenue by 12, giving a run rate of $360,000.

 

Company XYZ could also use their quarterly data and use a longer time period to calculate their run rate. If sales were $20,000 in January and $25,000 in Februaryโ€”thatโ€™s a total of $75,000 for the quarter. Multiplying the quarterly revenue by four gives a run rate of only $300,000, significantly lower than what we worked out based on the monthly data.

 

Why companies calculate run rate

Companies calculate the revenue run rate in order to have a better understanding of their business performance and potential for future growth. It helps them gain insight into their past, present, and future financial performance.

 

Companies use this metric to forecast the amount of money they can expect to generate over a given period of time. This is especially important for SaaS companies in predicting future growth.

 

Projected earnings

Calculating the revenue run rate of a SaaS company can be a powerful tool in estimating future earnings. By looking at current financial profitability metrics, a company can calculate its projected earnings for the upcoming period.

 

Projected growth

Revenue run rate is an important tool for SaaS companies as it helps them plan, forecast and make informed decisions to project future growth and identify areas of improvement.

 

Improved budgeting decisions

Companies can gain better insight into their profitability and cash flow and therefore help improve budgeting decisions.

 

Provides company benchmarks

Calculating the run rate of a company provides it with the ability to benchmark performance to predict market trends and see areas that may need improvement.

 

Downsides of using revenue run rate

Revenue run rate is not always the most accurate metric. If the company’s revenue fluctuates over time or if the month or quarter you use to estimate run rate is above or below the average, the results will not reflect reality.

 

The run rate also doesnโ€™t account for seasonality, churn, changes such as expansion and/or contraction, annual versus monthly contracts, or other factors which may affect revenue.

 

Seasonality

The revenue run rate does not take into account seasonality in the business environment. It is important to remember this omission when making predictions based on this metric.

 

Churn

Churn, which is the rate at which customers stop doing business with an entity, is not accounted for in the revenue run rate. Nothing remains the same so as the company growsโ€”churn might increase or decrease, customers may be upsold or downgrade, or a new competitor might enter the market, taking market share.

 

Changes in the environment

Economic, political or technological changes can all have an impact on the revenue of a SaaS business and should be monitored and factored into the revenue run rate calculations. Companies should also consider customer trends, pricing changes and changes in competition when estimating their future earnings.

 

One-time sales

One-time sales can have a significant effect on performance estimates if using the revenue run rate. These sales can be from initial customer purchases, upsells and cross-sells, or any other one-off purchases. Though these sales revenue do not generate regular subscription income, they can still contribute to the overall revenue of the company.

 

Fluctuating demand

Fluctuating demand can have a significant impact on the revenue run rate of a SaaS business. As customer demand changes, companies must be able to quickly adjust their revenue projections and strategies in order to keep up with the market.

 

Companies also need to take into account seasonal trends, economic cycles, and other external factors that may affect the revenue run rate.

 

When should companies use revenue run rate?

Companies should use revenue run rate when they need to gain a better understanding of their current and projected performance. It is an effective tool for measuring the short-term performance of a company, as well as predicting future revenues.

 

It can also be used to compare current performance against that of previous periods, providing insight into growth trends.

 

Starting a brand new company

Using revenue run rate as a metric when starting a brand new company can be beneficial, but it is important to remember that it is a backward-looking metric and does not take into account any unforeseen expenses.

 

When calculating their estimated annual revenue run rate, the company should take into account seasonality, changes in customer demand, pricing, competition and other external factors.

 

Restructuring an older company

When restructuring an older business, revenue run rate can be used to estimate the impact of any changes. It can help companies identify areas where there may be opportunities for cost-savings or increased profitability.

 

Additionally, revenue run rates can help measure the financial health of the company and provide insight into whether whether it is on track with its long-term goals. Run rates can also be used to benchmark the performance of a business against others in the industry, helping to identify areas where improvements could be made.

 

General reporting

Revenue run rate is an important metric for businesses to use when reporting on their financial performance. It helps to give a more accurate picture of the company’s revenue over time, and provides a snapshot of the current state of its finances. Run rates can be used in general reporting in order to assess the effectiveness of marketing campaigns, track progress and ensure they are on track with their goals.

 

Bottom line

Revenue run rate is a statistic that business owners and investors can use to predict future revenue. It takes into account the current revenue and growth rate to give an indication of what the future may hold.

 

This information can be helpful when making decisions about investment, expansion, and other strategic moves. While it’s not perfect, revenue run rate can give you a good idea of where your business is headed and how fast it’s growing.

 

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