As an entrepreneur, run rate is one of the many crucial metrics that should be on your radar.
It’s an informative metric, yet many don’t know what it means. You probably have a lot on your plate as a small business owner. In addition to running day-to-day operations, you need to think about the future and how you can grow your company.
Run rate can help you understand how much money you make each month (or year). It’s also useful because it allows you to track progress month over month and year over year to identify trends or shifts in performance.
Before calculating run rate, you need to know what it is and why it matters to your business.
And if you have any questions throughout the article, write them down and reach out to our experts at Founder’s CPA after reading!
What is Run Rate?
Run rate is a financial term referring to the amount of money a business makes in a specific period. Entrepreneurs, investors, and analysts often use it to make informed decisions and determine a company’s potential.
It can be calculated at any given time, but most commonly as a startup metric. The run rate also determines how quickly a company is growing or shrinking and how long it will take for them to reach its target revenue goal or break-even point.
Why Does Run Rate Matter?
Run rate can be an indicator of a business’s health, especially for companies reliant on recurring revenue. You can use run-rate data to predict future revenue trends and decide how much inventory you should carry at any given time.
It also gives you valuable information on how much your company is making and how much cash flow you have to pay bills or invest in new projects. With this information, you can better prioritize.
Run rate also gives you a benchmark for measuring your progress over time. When starting a new business or launching a new product line, it may take some time for things to take off. But consistent increases in your run rate are a good sign that things are going well!
In addition, you can use run rate to benchmark your company against others. Comparing your business against similar organizations in your industry can help identify trends in their performance over time and give you an idea of where they might be headed next. This type of benchmarking also allows you to see improvement potentials within your organization.
What’s more, run rate can help appeal to investors. When sharing your financials with potential investors, they’ll want to know how much revenue and profit you’re generating each month, quarter, and year. Run rate makes it easy for them to compare these numbers with those from previous periods and helps them accurately assess your company’s financial health.
How Do You Calculate Run Rate?
To calculate run rate, you’ll need to multiply the revenue over a period by the number of periods in a year. Here is the formula to use:
Annual Revenue Run Rate = Revenue in Period x Number of Periods in a Year
For example, a company posting revenue of $15,000 in June calculates its annual run rate of $180,000 as follows:
$15,000 x 12 = $180,000
We can help you with these calculations, so contact us to learn more!
How Do You Improve Run Rate?
Depending on your business type, there are many ways to improve your run rate.
Recurring revenue streams are powerful levers to improve your run rate because they provide steady streams of additional income that will continue. For example, selling software as a service (SaaS) monthly with net new SaaS subscriptions will improve your overall run rate.
Some other effective short-term strategies include:
Sales – Increase the number of sales you make each day or week. It could be by increasing traffic to your store or website or making more customer calls.
Discounts – Offering coupons or discounts can drive more customers in the door, increasing the likelihood they will buy something once they’re there. Retailers often use this strategy in traditionally slow periods when they don’t have enough customers.
Product upgrades – Offer an upgrade on products so that customers will pay more than they would typically pay for the base product. For example, offering customers a free upgrade from standard shipping to overnight delivery might encourage them to pay more for the services.
Cross-selling and upselling – This is when you offer products or services to your existing customers. If a customer has already bought a product, you can offer them an upgrade or add-on to their purchase. For example, someone buying a new TV might be enticed by an extended warranty or surround sound system.
Need Help Leveraging Run Rate for Your Business?
Run rate is a financial concept that helps you make better decisions about your business. The metric is crucial in the early days of your startup. The advantage of run rate over other metrics is that it gives you an idea of how much money you’re bringing in each month before expenses are taken out of your profits.
Run rate also makes it easier for investors to evaluate your company’s health and predict its future profitability based on its current performance.
Contact Founder’s today, and our team of experts will help you leverage run rate to improve your business.