Like top-notch weatherpeople, savvy business leaders are also responsible for accurate forecasting. A run rate, which shows how much revenue your company will generate in the near future, is one tool that can help.
It’s essential to calculate your run rate accurately to make decisions about your business’s future. In this article, you’ll learn what a run rate is and how to calculate it. You’ll also see examples of how run rates are used in the real world. Let’s dive in.
Cons of Run Rate
How to Use Run Rate
Now that you know what a run rate is, let’s discuss how to calculate it. The run rate calculation is relatively simple and only requires two pieces of information:
Calculating run rate is a two-step equation. First, you will need to determine how often your selected time span occurs in a year. This number becomes your annual time spans. To calculate annual time spans, use the following equation.
The next step is to use your annual time spans to calculate your run rate.
Here’s an example of what that might look like. Let’s say you’re running a bakery. The company has only been in business for seven months. It has generated $500,000 in revenue up to this point and is now looking to gauge its future performance based on this existing data.
The sales team then decides to calculate the business’ run rate for the next seven months.
Companies often calculate their run rate on an annual basis. You can also measure your run rate monthly or quarterly.
For example, if you’re considering opening a new store, the run rate can help determine whether the venture is feasible. If your run rate is $274.32 per day and you need to generate $300 per day to break even, then you know that opening a new store is not a good idea.
Now that you know what a run rate is and how to calculate it, let’s discuss how to use this information.
Run rates can be valuable tools for forecasting your company’s future sales. If you’re considering making a major decision for your business, such as expanding your product line or opening a new store, your run rate can help you determine whether now is the right time to act.
However, don’t rely on your run rate alone. Consider your run rate in conjunction with other factors, such as your company’s historical sales data and knowledge of the current market conditions. This holistic picture can help guide your final decision.