Revenue run rate is a financial metric used to calculate a company’s future revenue. Usually, this metric takes revenue earned during a recent month or quarter and projects it across a year, estimating annual revenue if current trends continue. For example, if a company earns £1 million in revenue in one quarter, the annual run rate would be £4 million.

This metric is often used by startups and fast-growing companies to forecast annual earnings, especially when recent growth or changes in the business mean that historical financial performance can’t fully predict future results. Sometimes, run rate can be overly optimistic or simplistic, because it assumes stable conditions and ignores seasonal variations, market dynamics, or changes in operational circumstances.

Below, we’ll explain why companies use revenue run rate, how to calculate it, limitations to be aware of, and how it compares to annual recurring revenue (ARR) and monthly recurring revenue (MRR).

What’s in this article?

• Why do companies use revenue run rate?
  
• How to calculate revenue run rate
  
• Limitations of revenue run rate
  
• How revenue run rate compares to ARR and MRR
  

Why do companies use revenue run rate?

Companies use revenue run rate (RRR) to understand their financial performance and make informed business decisions. Here’s what RRR can tell you about your company.

• RRR helps companies estimate their annual revenue. This allows them to forecast future revenue, set realistic financial goals, and plan budgets accordingly. It’s particularly useful for startups and high-growth companies.

• Revenue run rate provides a quick snapshot of a company’s financial health. This can be used to assess the effectiveness of sales and marketing strategies, identify trends in revenue growth, and compare performance to industry benchmarks.

• It helps investors understand a company’s revenue potential. It’s commonly used in investor presentations and financial reports.

• It can inform business decisions including pricing strategies, hiring plans, and investment allocations. For example, a company with a strong RRR might feel confident to invest in new product development, while a company with a declining RRR might need to focus on cost-cutting measures.

• It can determine a company’s valuation during fundraising rounds. A high RRR can signal strong growth potential and make a company more appealing to investors.

• Comparing RRR to industry averages or competitors can help companies gauge their market position and identify areas for improvement.

• RRR can help sales teams and employees understand the impact of their efforts and strive to achieve revenue targets, which can serve as a motivational tool.

How to calculate revenue run rate

How you calculate RRR depends on what kind of revenue data is available. If you have monthly revenue data, take the total revenue for one month and multiply it by 12.

For example, if a company’s revenue in June is £50,000, its revenue run rate calculation would be:

£50,000 June Revenue x 12 Months = £600,000 RRR

If you have quarterly revenue data, take the total revenue for the quarter and multiply it by 4.

For example, if a company’s revenue in Q2 is £150,000, its revenue run rate calculation would be:

£150,000 Q2 Revenue x 4 Quarters = £600,000 RRR

If you have revenue data for any other period (e.g. a week, 28 days), then take the total revenue for the period, divide it by the number of days in that period to get the average daily revenue, and then multiply the average daily revenue by 365 (number of days in a year).

For example, if a company generates £21,000 in revenue over 28 days, its revenue run rate calculation would be:

(£21,000 Revenue in the Period ÷ 28 Days) x 365 Days = £273,750 RRR

Limitations of revenue run rate

The RRR is an estimate of future revenue, not a guarantee. The run rate can give an overly optimistic or pessimistic view of the company’s financial health, which can mislead stakeholders, investors, or potential buyers about the actual performance and stability of the business. Businesses might make strategic decisions based on these projections – such as scaling operations, hiring, or determining capital expenditure – that might prove unsustainable if the projected revenue doesn’t materialise.

Here are the main factors that limit the revenue run rate’s accuracy.

• The run rate is calculated with the underlying assumption that business conditions and revenue will remain constant throughout the year. It does not account for seasonality, market fluctuations, or changes in the business environment due to regulatory changes, new competition, supply chain disruptions, or economic downturns. Businesses should use data from multiple months or quarters to account for seasonality and fluctuations when calculating the RRR.

• Run rate calculations often fail to distinguish between recurring and one-off revenues. If a large portion of the revenue in the calculation period comes from one-off transactions, the annualised figure will not accurately represent future earnings.

• For companies experiencing growth or decline, the run rate might not accurately predict future revenues, because the metric is based on a snapshot in time. This can be misleading for strategic planning and investment decisions.

Because of these risks and limitations, businesses must use revenue run rate in conjunction with other financial metrics – such as customer acquisition cost, lifetime value, and churn rate – to gain a more comprehensive understanding of their financial position and prospects.

How revenue run rate compares to ARR and MRR

Revenue run rate, annual recurring revenue, and monthly recurring revenue are all related financial metrics that look at different aspects of a business’s revenue. ARR and MRR deal only with recurring revenue, while RRR looks at all revenue. ARR and RRR project revenue across a year, while MRR focuses on monthly revenue.

Because ARR and RRR are both projections, they’re limited by the assumption that current revenue trends will remain unchanged. MRR is a snapshot of monthly earnings used for immediate financial management and planning, while ARR helps the sustainability of recurring revenue streams and RRR is used for broader financial forecasting and growth estimation.

Here’s a further breakdown of these metrics.

Revenue run rate

RRR is a metric used to extrapolate annual revenue based on earnings from a short period, typically a month or a quarter. It includes all types of revenue, whether recurring or one-time, and projects what the total annual revenue would be if current conditions and performance continued throughout the year.

RRR is commonly used by companies that do not have only recurring revenue streams, or that are in early stages and want to predict annual revenue based on initial or short-term results. This metric does not account for fluctuations due to seasonality, market changes, or nonrecurring sales, and it assumes stability in revenue generation, which can be unrealistic.

• Calculation: Multiply the revenue of a single month or quarter by 12 or 4, respectively, to project it over a year.
  

Annual recurring revenue

ARR measures predictable and stable revenue that a company expects to repeat annually from subscriptions or ongoing contracts. It’s primarily used by companies with a subscription-based business model or contracts that generate regular, consistent income – for example, software-as-a-service (SaaS) companies, membership services, etc.

ARR provides a clear picture of stable, predictable income, which is important for assessing the financial health of companies with recurring revenue models. But because it excludes one-off payments and non-recurring revenue, it can give an incomplete picture of total company revenue, and it also fails to account for potential fluctuations due to seasonality or market changes.

• Calculation: Total all recurring revenue and annualise it, often by multiplying monthly recurring revenue by 12.
  

Monthly recurring revenue

MRR is a measure of the predictable and recurring revenue that a company earns from its subscribers or customers each month. It’s specific to businesses that operate on a subscription or ongoing contract basis.

MRR provides clarity on the financial health and predictability of monthly income, which helps subscription-based businesses with budgeting, forecasting, and operational planning.

• Calculation: Multiply the total number of monthly paying customers by the monthly average revenue per user (ARPU). This can also include adjustments for upgrades, downgrades, and churn.