Tips for Calculating a Revenue Run Rate

The run rate revenueis a way for a business to forecast revenue over a given period of time, typically a year or possibly longer. This forecast is based on previously earned revenue and can give a business a good idea of what to expect in the future. With that in mind, here are some tips for how your business can best calculate a run rate to improve its future revenue forecasting abilities.

The Significance of Revenue Run Rate

The importance of revenue run rate is that it allows us to forecast the next quarter’s revenue. In the past, we’ve used earnings forecasts to predict quarterly revenue. Now we can use the same models to predict revenue in the next quarter. If we had shown our previous quarter’s run rate, we’d be able to figure out the change in earnings over time. This would allow us to forecast the earnings through the second quarter and future quarters.

This approach doesn’t show us the actual revenue for the quarter; instead it shows us the quarterly revenue run rate, which allows us to tell whether the growth will continue through future quarters. In other words, it helps us predict quarterly revenue without having to project future sales numbers.

Calculating Revenue Run Rate

Before calculating the revenue run rate, you need to know how much sales you have brought in in the past year. After this, you need to know how much of your total revenue you’ve already earned from these sales.  To calculate your future revenue, divide your total revenue earned for the current quarter by the total average revenue earned for the past four quarters. This equals the percentage of future revenue you expect.

For example, if your company generated $100,000 in revenue last quarter and you actually earned 20 percent of this in Q4, you can expect to earn $20,000 in the current quarter.  The goal of this calculation is to allow you to estimate the percentage of your revenue that you will earn in the next quarter, and then calculate the total revenue you will earn for the full year based on this percentage.

When to Use Run Rate Revenue

Revenue run rate helps you estimate the future growth of your business. It also shows the changes in your business over time, which is an important aspect of long-term business planning. Using this calculation, you can estimate the revenue you need to break-even, your monthly revenue, and your annual revenue and how that all impacts your business’s growth rate.

Conclusion

Adjusting your monthly or quarterly profit and loss statements is an important part of your overall success. If you’re new to running a business, you should be setting a profit and loss goal.  The two most common reasons why businesses lose money are lack of experience and underestimating expenses. To avoid this, use a profit and loss spreadsheet to analyze these issues.

An annual profit and loss process is a good way to assess how much you’re earning versus how much you’re spending.  Learn how to write a profit and loss statement so you can know exactly how much you’re spending on the various costs of running your business.  You should also set up a weekly review meeting with your entire staff so that you can go over your business costs and better understand your revenue run rate.