Revenue run rate

Revenue run rate is a short recent period of revenue annualised into a forward number. Take one month and multiply by twelve, or one quarter and multiply by four, and you have what the year would look like if nothing changed.

That last clause carries all the risk. Nothing stays unchanged, so a run rate is an arithmetic statement about the recent past wearing the clothes of a statement about the future.

It is not annual recurring revenue, which annualises contracted subscriptions held at a point in time. It is not a forecast either, because a forecast weighs what you expect to happen and a run rate refuses to.

Key takeaways

• A run rate is arithmetic rather than a prediction — one recent period multiplied up to a full year.
• The shorter the base period, the more one large deal or one quiet month distorts the answer.
• Strip out anything that will not repeat before you annualise, or you will annualise a one off.
• It is useful shorthand for a steady subscription base and close to meaningless for a seasonal business.

How it works

Pick a period, strip out anything that will not repeat, then annualise what is left. A month times twelve, a quarter times four. The shorter the base period, the more a single deal moves the result.

Start with what is being annualised. The United States Securities and Exchange Commission’s investor glossary describes revenue as the total money a company generates selling goods and services.

That is a record of what happened. Annualising it does not change its nature, and the forward number you publish is still built entirely out of the past.

Public filers are held to periods, not extrapolations. Item 303 of Regulation S-K requires that the management discussion cover the periods covered by the financial statements and not merely repeat the numbers already in them.

Annualising is not the same as growing. A run rate rises simply because the base period was a good one, so two businesses quoting the same figure can be heading in opposite directions.

Strip the one offs first — a migration fee, a hardware charge or a single professional services project will all annualise into money that is never coming back.

Investors ask for the base period before they react to the number. A hundred million quoted from one strong month is a very different claim from the same figure quoted off a full quarter.

The measure behaves honestly in a recurring revenue model, where the same income repeats by design. In a project business it is closer to a guess — with a multiplication sign attached to it.

Pair it with net revenue retention rate, which shows whether the base you annualised is growing or shrinking underneath the arithmetic you just did.

Revenue per user is the other sanity check worth running — if the run rate climbed while this one fell, the growth was bought rather than earned.

Examples

The measure is quoted most where growth is fast and history is short, and it is least reliable exactly there. Three situations show the range, from the honest version to the one that should carry a warning label.

A software company billing nine million dollars in its best month will describe itself as running above a hundred million a year. The arithmetic is sound, and it still assumes every one of those customers stays.

Hypergrowth companies quote it for an obvious reason. A run rate captures the latest month only, so a business doubling each year looks far larger in run rate terms than in last year’s filed accounts.

An outsourcing provider adding seats through a quarter has the opposite problem. The quarter contains two months at the old headcount, so the run rate understates where the contract has already landed by the end of it.

A seasonal retailer should not publish one at all. December times twelve is not a year, and anybody annualising a peak month is describing a business that does not exist.

The number also ages badly. A run rate published in March describes February, and by June it describes a company that has hired, churned and repriced several times since.

Related terms

These five sit close enough to be confused with it. Two are contracted measures rather than extrapolations, two describe the models the arithmetic suits best, and one is the per unit figure used to check that growth is real.

• Annual recurring revenue: the annualised value of active subscriptions, which is contracted rather than extrapolated from a period.
• Recurring revenue model: the business model in which a run rate behaves most honestly.
• Net revenue retention rate: the movement in the existing base, which a run rate cannot show on its own.
• Revenue share model: the commercial arrangement where income varies with a partner’s volume, making any annualisation fragile.
• Revenue per lead: the top of funnel unit figure that explains whether a rising run rate has demand behind it.

FAQ

How do you calculate a revenue run rate?

Take the revenue of a recent period, remove anything that will not repeat, then multiply up to a year. One month times twelve, or one quarter times four.

Is a run rate the same as annual recurring revenue?

No. Annual recurring revenue counts contracted subscriptions active at a point in time, while a run rate annualises whatever happened to be billed in a chosen period.

When should you not use one?

Avoid it in seasonal businesses, in project work, and in any period containing a one off deal large enough to move the total on its own.

Which period should you annualise?

A quarter is the safer default because it smooths monthly lumpiness, and a single month only works when the income is genuinely steady.

Why do investors ask about run rate?

Because it is the fastest way to size a young business whose filed accounts are already out of date.

Compare vetted growth and finance teams across the Outsource Accelerator outsourcing marketplace before you scale on a run rate number.