The run rate is a method used to project a company’s future revenue based on its current performance over a short period, typically extrapolated to an annual figure. It helps startups estimate potential earnings by assuming that recent revenue levels will continue consistently.
Why do startups use a run rate?
Startups use the run rate to forecast annual revenue based on recent performance, which is helpful for planning, budgeting, and setting growth targets. It’s a quick way to understand potential revenue if current trends persist.
What are the limitations of using a run rate?
The run rate assumes that recent revenue levels will remain steady, which may not account for seasonal fluctuations, market changes, or growth surges. For this reason, it’s best used with caution and in combination with other forecasting methods.
How is a run rate calculated?
To calculate a run rate, take the revenue from a short period (e.g., one month or one quarter) and multiply it to reach an annual figure. For instance, monthly revenue multiplied by 12 provides an estimated annual run rate.
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