What is Revenue Run Rate? Formula, Examples, and why it is Important

Why you should track your revenue run rate

Regularly tracking your revenue run rate offers the following benefits: 

• Easily estimate your annual recurring revenue – You can use run rate (while accounting for other SaaS metric base rates) to quickly predict your company’s annual recurring revenue (ARR).
• Helps investors quickly estimate your growth and top line – Your revenue run rate helps you place growth in context by comparing previous run rates to the current run rate. 
• Offers a starting point for capacity planning – You can use the revenue run rate to predict your company’s ARR as explained above. Your predicted ARR can then be used to plan the capacity you will need to achieve your revenue goals and fulfill customer expectations.

Simplifies continuous planning – Run rate is easy to calculate regularly, making it a very useful metric for a SaaS company’s continuous planning efforts. Using the revenue run rate to measure how growth affects revenue forecasts can help you adjust your business plans and revenue goals on a rolling basis.

How to calculate the revenue run rate

Below is the formula for calculating revenue run rate:

Example of a revenue run rate calculation

You can calculate revenue run rate using different time periods, including weeks, months, and quarters. Here’s a simple example of calculating a company’s revenue run rate using two different periods - monthly and quarterly run rate:

You’ll notice that in our example, the calculations using different time periods produced different results. This is because the revenue run rate is heavily influenced by any revenue trends during the base period used for the calculation. Generally, the longer the time period, the more those trends tend to smooth out.

Is run rate the same as revenue and ARR?

No, run rate, revenue, and annual recurring revenue are three separate metrics. 

The differences between revenue run rate and revenue are:

The differences between revenue run rate and ARR are:

• Revenue run rate projects future revenue that includes non-annual contracts, one-time purchases, and non-subscription-based income. ARR only calculates revenue from active subscriptions.
• Any type of business can use the revenue run rate metric in their planning. However, not every business can use ARR because it only applies to subscription-based business models.

To understand the difference between revenue and ARR, read this article.

How to use the revenue run rate

Using the revenue run rate is a quick and easy way to roughly predict future revenue, calculate potential ARR, and monitor growth. However, there are some caveats you need to keep in mind when evaluating your results.  

Drawbacks to using the revenue run rate

The revenue run rate isn’t always the most accurate metric for revenue forecasting because it’s based solely on historical data. Some of the drawbacks that make revenue run rate risky to use are that it:  

• Does not account for seasonality – Monthly and quarterly sales revenue can differ greatly when measured during the high season compared to the low season. Revenue run rate calculations for the same company will vary depending on the time of year in which they are made.
• Does not account for churn – Churn occurs when customers do not renew subscriptions. Churn rates will reduce your ARR should more customers stop using your services compared to those who sign up. The revenue run rate assumes growth will be constant, which could result in major discrepancies between the run rate and actual revenue captured.
• Can present unrealistic numbers in tough economic conditions – Revenue run rate cannot anticipate major economic shifts in a turbulent business climate. If sales drop due to an external factor like a recession, the run rate won’t account for that.
• Assumes capacity remains the same – Run rate assumes your capacity will remain the same. However, you might remodel your capacity based on metrics like the Q factor. Revenue run rates are based on revenue data that is current at the time they are calculated and cannot account for changes not yet made at that time. 
• Does not account for one-time revenue windfalls –  A significant one-time sale during the period you use to calculate the revenue run rate will skew projections for the entire year resulting in a result that is artificially inflated and thus inaccurate.   
• Does not account for new business ARR – Your company may be about to introduce a new product or service that will boost sales and revenue. The revenue run rate can’t account for this future increase and its predictions may fall short of real revenue growth.

Given these drawbacks, the pertinent question is when should you use the revenue run rate?

When to use the revenue run rate

Despite the caveats noted above, the revenue run rate can be useful in the following circumstances:

• When you’re trying to secure funding for a new company – If you haven’t been in business long enough to use alternative metrics, and given the market is stable, the revenue run rate can offer investors a quick picture of your growth prospects.
• When you are changing strategies – When switching growth strategies, you can use the revenue run rate as a benchmark to gauge whether your changes are working and whether your new plan is feasible. For example, if you’ve restructured your sales team and you see an increase in your revenue run rate, you can be fairly certain your strategy is working to boost your revenue.‍
• When you want to provide quick insights to your sales and GTM teams – Run rate is an easy metric that sales and GTM teams can use to assess whether their efforts are in line to meet their revenue quotas and targets.

How Drivetrain simplifies run rate tracking and analysis

Revenue run rate can offer quick and easy insights into your company’s growth by providing simple-to-calculate revenue predictions at any point during the financial year. Unfortunately, the run rate is also subject to significant drawbacks. As a result, it’s best to use revenue run rate alongside other SaaS metrics to get a fuller picture of your business’ financial future.

Drivetrain makes it easy for you to track and analyze your SaaS company’s revenue in several different ways to ensure you’re getting the comprehensive and accurate information you need . With Drivetrain, you get access to: 

• Rolling revenue forecasts – You can track growth on the go with on-point revenue forecasts that seamlessly adjust to unexpected changes in your income streams. 
• Accelerated reporting – With regular reports on variables such as churn and sales capacity, you can adjust your revenue expectations and know when you need to  recalculate the run rate to improve its accuracy.
• Powerful SaaS metrics and calculations – Switching to KPI-based SaaS financial planning allows you to base your business strategies on more than just one, at times flawed, metric.