Revenue run rate is often used as a metric for evaluating private companies. This calculation represents the number of times the company’s annual revenue would need to change to break even, assuming that it had no capital expenditures, depreciation, or amortization of assets.
Why should you care about the revenue run rate? Well for one, it will tell you if your business can sustain its current growth rate. What’s more, understanding how it works may help you decide whether or not investing in a company is worth it. With that in mind, here is why understanding how revenue run rate works is important.
Why does the revenue run rate matter?
In today’s age of technology, it’s more important than ever for business owners to know how fast their business can grow and become more profitable. For example, if you run a local coffee shop, you may want to hire a new employee to help you keep up with the rush. The problem is, if your revenue run rate is too low, it’s difficult to afford a new employee and the additional overhead might possibly drive the business to the breaking point. As a result, your company may be forced to close down or fail to secure financing.
If your business already makes a lot of money, this might not be as important. But if your business isn’t making nearly as much as it could, it’s still a good idea to keep an eye on your revenue run rate.
Other benefits of understanding the revenue run rate
The revenue run rate is also a good benchmark for measuring how fast or slow your business will be growing. For example, say that you are just starting out and your revenue run rate is $30,000 a month, a growth rate of 15%. It’s unlikely that your growth will get much faster than that rate for the next 12 months. However, if you double your revenue and start making $60,000 a month in sales, your growth rate would almost certainly accelerate.
The same can be said if your revenue growth was initially 15% and then your growth rate doubled to 30%. The combination of slower initial growth and accelerated growth might give you an impression that your company is slowing down, but this is only the case if the run rate is not in fact improving at the same rate.
Why you should care about the revenue run rate
You should care about the revenue run rate if you’re considering investing in a company. Most private investors are in it for the long-term, and understanding the revenue run rate is a great way to get an idea of how fast a company is growing. Not only that, it gives you a glimpse of the growth potential the company will experience in the future.
It also provides insight into whether a company is currently doing a good job of managing its cash flow. Cash flow is the money left over from revenue that’s generated after paying all operating costs and debt servicing. Run rate, however, takes out some of the excesses in spending. This can be beneficial to investors who don’t want to see cash flow piled up on the balance sheet.
Conclusion
The definition of an important statistic is often less obvious than you may think. This is particularly true when it comes to revenue run rate. However, it is important to understand this calculation so that you can better understand the long-term value and potential of a growing business.
