If you want to know the value of your company, it’s important to know how much revenue you make. There are many different ways to calculate this number. But one of the most important is called revenue run rate. This measures how much your company will be worth if it keeps up with its current growth rate. Here is how revenue run rate can be used, and why it’s so important for business owners to understand this method of analyzing a business.
What is revenue run rate?
Run rate revenue shows you how much revenue a company is expected to earn over the next three to four years. Once you know how much you’re expected to bring in, you can then factor in how much you need to invest in your business to make sure it continues to grow and scale.
Let’s say, for example, that you own a restaurant and your revenue run rate is $10,000 per month. For starters, this is a really low rate of revenue, as restaurant revenue can easily be more than $10,000 per month. On the other hand, if you were making $500,000 per year, your restaurant would be making more than $40,000 per month. This is because you’d be making many sales each month, and would be moving well beyond your $10,000 goal.
Why is revenue run rate important?
Without calculating your run rate revenue, you are stuck with only three things to work with, which can be frustrating. These three things include:
- Your company’s average revenue per user
- Average monthly revenue
- Average daily revenue
If you want to know the value of your company, you need to know how much revenue you make and how much it costs to run your business, even on a monthly basis. This isn’t easy to figure out, but it is possible. You’ll need to come up with some assumptions. But you’ll have more numbers at your disposal than you think.
Revenue run rate will help you compare your company’s current value against how much it will be worth in the future. It is a useful tool for comparison, especially when it comes to comparing different kinds of businesses.
How does revenue run rate work?
Run rate revenue is calculated using a simple formula. The calculation works similarly to the concept of compound interest. This involves subtracting the cost of acquiring new customers from the total revenue they generate. As the revenue grows, the cost of acquiring new customers also decreases, so that it’s cheaper for you to acquire them each time. Once you’ve run this calculation enough times, you’ll have the answer to your growth rate.
Why is it important to use a conservative estimate for this calculation?
It’s important to use a conservative estimate for this calculation. In the early stages of a business, it may not be financially smart to make large capital expenditures into your business. Therefore, your company’s revenue run rate should show a downward trend.
Think of a bear market. If your company’s revenue is just about to go down, you shouldn’t be spending a fortune. You want to save your money for when the economy is doing well.
Conclusion
Data is often one of the biggest challenges for business owners to overcome. It is important to be able to get all the right information in order to make smart business decisions. The right data means having good data analysis skills. When you’re familiar with the different ways to determine your business’ value, then you are much more likely to make good business decisions.
