In business, one of the most important financial metrics is the revenue run rate. This is a measure of the future potential of a company’s cash flow and profitability by taking into account current sales and expenses. It can be used to predict how long it will take for a company to break even or recover from losses, analyze balance sheets, and evaluate a company’s creditworthiness. With that in mind, here are some ways you can apply a revenue run rate to your business.
Know your revenue run rate
To calculate your run rate revenue, you’ll need to know your company’s sales and profit growth trends over the last three years. This will help you determine the “normal” revenue run rate for the future. Since your business will have revenue peaks and valleys due to seasonal factors, it’s also important to factor in a rough estimate of your year-end sales.
For example, if a seasonal market is good for about a month a year, then in order to predict the run rate of your company’s sales, you’ll need to adjust your sales growth rates for that single month (October for Halloween sales, for example).
To determine a revenue run rate, you can use a customer acquisition cost formula (CAC) or a trailing sales rate to gauge the business’ growth rates for different time periods.
Use it to predict your break-even point
If you’re in business to sell products or services, the first step is to determine how much revenue you can expect to make in in a year. Calculate your average annual sales over the last three years, and multiply it by the percentage of time between the end of one period and the beginning of the next. If you’re like most businesses, this won’t be easy, as the amount of time between periods can vary widely.
However, it’s still an effective method, because by using a specific year of sales as a basis for determining the amount of time between the end of one period and the beginning of the next, you can account for unpredictable seasonal sales and other business events.
Check a company’s creditworthiness
The most basic way to check a company’s creditworthiness is to look at its credit card and personal loan balances. Since you should never use a credit card and personal loan at the same time, you should try to look at how much credit they actually use. If the company uses their credit cards and personal loans beyond what they bring in in revenue, you might want to be careful.
You can also check how the company’s balance sheet is changing over time, or if the company has paid off any of its obligations. You should make sure that you’re keeping an eye on your credit reports so that you’re aware of any inaccuracies.
Analyze balance sheets
To determine a company’s revenue run rate, you can examine the cash flow and operating income statements of the last four quarters. Look for recurring revenue sources, such as those that result from contracts with clients, or those that produce a flow of cash based on membership dues. Revenues with fluctuating costs, such as those associated with travel, are a red flag. On the other hand, track the decline in cash and accounts receivable in comparison with sales. A company with a large and stable cash flow can apply the full amount of its revenue to the business to generate new assets.
A high revenue run rate can tell you if your company is still profitable, and if you can still grow the business into the future. Revenue run rate is especially useful when you’re considering a business partner, as this number can be a good starting point in evaluating an investment.