What is run rate?

Definition

Run rate takes a recent period's results and stretches them to a full year. It is a rough forward estimate, not a closed annual total.

On the books, it is not an account. May revenue still posts as May; times-twelve is a planning figure beside it.

A month times 12, or a quarter times 4, is the usual shape. The figure assumes the recent pace keeps going.

Where it shows up

P&L: Related to annualizing a recent period's results as a rough forward view.

Balance sheet: Related to nothing extra; run rate is a P&L-style annualization.

Cash flow: Related to annualizing recent cash results the same way when cash is the base.

See also: Forecast · Annual Recurring Revenue · Revenue

When you look at your Income Statement, this figure is last month's or last quarter's income and expense multiplied out. It is not a printed row on the statement.

The Balance Sheet does not hold a run-rate balance. Nothing extra sits in assets or liabilities just because you annualized a month.

Cash can be annualized the same way when the base is receipts or payments. Stretching income does not, by itself, tell you what the bank will do.

Owners usually keep this in a planning file or a board packet. The live books stay the record of what already posted.

How it works

Pick a recent closed slice. A full month is common; a quarter is common too.

The usual shape is:

• A month times 12
• Or a quarter times 4
• The figure assumes the recent pace keeps going

Multiply that slice so it covers twelve months. May revenue of $8,000 times 12 is a $96,000 revenue run rate.

The math assumes the pace does not change. Season, one-time jobs, and a short month can all make that assumption weak.

The method is the annualization. Adding judgment, new hires, or a lost contract turns the figure into a different kind of projection.

Net income can be annualized the same way as revenue. So can operating expenses, if that is the line you care about.

This is not a journal entry. Nothing in the general ledger changes because you multiplied May by twelve.

If May was an unusually busy month, the yearly figure will sit high. If May was quiet, it will sit low.

Update the figure when the next month closes. The new month becomes the base; the old times-twelve drops away.

Example

A tutoring center posted $8,000 of lesson revenue in May. The owner wants a quick yearly picture without rebuilding the whole plan.

May times 12 is $96,000. That is the revenue run rate from this one month.

The books still record June lessons as they are taught. The $96,000 is the stretch of May, not a book entry for the year.

If June comes in at $7,000, a fresh run rate would be $84,000. The method follows the latest slice, not a twelve-month total.

A one-time exam-prep package in May would have inflated the $96,000. The owner should strip that kind of item before multiplying, or pick a quieter base.

The Financial Statement Package still shows May as May. The yearly figure lives in the planning file beside it.

Common mix-ups

Run rate is not the same as trailing twelve months. Trailing twelve months adds the last twelve months that actually happened; this figure multiplies a recent slice as if it continued.

It is not the same as an updated projection. A projection can change hiring, prices, and mix; this figure is the recent pace times twelve.

It is not the same as annual recurring revenue. Annual recurring revenue restates subscription revenue on a yearly basis; run rate can stretch any recent line, subscription or not.

Related terms

• Forecast: An updated projection of where the numbers are actually heading.
• Annual Recurring Revenue: Monthly recurring revenue expressed on a yearly basis.
• Burn Rate: The average monthly pace at which cash is being consumed.
• Revenue: The total value of goods and services the business earned in a period.
• Trailing Twelve Months: The most recent twelve months of results, regardless of fiscal year.
• Budget: The approved plan of revenue and spending for a coming period.
• Monthly Recurring Revenue: Normalized subscription revenue for a single month.
• Rolling Forecast: A forecast that always extends the same number of periods ahead as time passes.