Revenue Run Rate (RRR)Link to this section
Revenue Run Rate (RRR) is a metric that uses recent historical revenue to predict future revenue. It is used by companies to understand and analyze their financial performance and provides a historical trend line to forecast performance in the future.
It is particularly useful for startups because:
- recently founded startups may have limited data on which to base their forecasts
- significant growth startups’ early years may not be able to be reliably predicted.
RRR provides a methodology to predict revenue based on the latest historical information at hand.
What is Revenue Run Rate (RRR)?Link to this section
Revenue Run Rate (RRR) is a simple and quick way to estimate and predict future revenue based on your past performance. RRR uses past revenue data from a specific period of time and translates it into an estimate of annual revenue.
It’s important to note that RRR does not always result in an accurate revenue forecast because it assumes the business will continue to earn revenue at the same rate as the extrapolated period (which generally doesn’t happen) due to internal and external factors like churn rate, growth rate, changes to pricing structures and seasonality.
How to calculate RRRLink to this section
RRR is calculated by extrapolating a historical revenue data (weekly, fortnightly, monthly, quarterly etc) to an annual period.
Let’s say you want to calculate the RRR using April’s earnings of $30,000. To figure out your annual run rate you’d need to multiply $30,000 by 12 months, giving you a RRR of $360,000.
In another example, if you wanted to calculate your RRR based on your $12,000 in revenue from the last 85 days, you’d simply divide $12,000 by the time period of the data, in this case 85 days, and multiply it by the number of periods (in this case, days) in the year. This would be calculated as $12,000 divided by 85 days multiplied by 365 days in the year, giving you an RRR of $51,530.
How does RRR differ from Annual Recurring Revenue (ARR)?Link to this section
RRR and Annual Recurring Revenue (ARR) are both financial metrics used to measure a business’s revenue. But there are some big differences between the two metrics in their uses and calculation methods.
RRR is a metric used to predict annual revenue based on your company’s current pace of revenue recognised.
RRR operates on the assumption that recurring revenue will continue to be generated at the same rate., meaning it doesn’t take into account revenue changes that might happen in the future.
On the other hand, ARR is used by SaaS businesses to calculate the revenue from recurring subscription income. ARR only takes into account the recurring revenue generated by the business, meaning it excludes one-time revenue.
For example, if a SaaS business offers additional products (like hardware for purchase) it wouldn’t be included in the ARR but it would be included in the RRR.
RRR is a more general financial forecasting metric which can be used by any business model, while ARR is more typically only used by companies with a subscription model.
The benefits of using RRRLink to this section
RRR can be useful for businesses to gain a simple snapshot of business performance, estimate future revenue and support with financial projections.
- Simple and easy to calculate: one of the main advantages of RRR is the simplicity of the calculation.
- Provides a snapshot of financial performance: if financial data is only available for a quarter or a month, RRR can provide a prediction of financial performance for the remainder of the year.
- Benchmarking performance: RRR can be useful as a historical baseline line to use for planning purposes or to compare actual revenue performance.
The limitations of using RRRLink to this section
The main challenge of using RRR to predict future revenue is that it assumes the business will continue to earn revenue at the same rate. If you’re calculating RRR using revenue from a certain month that happens to be above or below normal levels, your RRR won’t be able to offer an accurate forecast.
- Seasonality: revenue can be significantly impacted by the time of year. And, if you’re calculating RRR based on the busiest months of the year, it’s likely that your RRR will be inflated. On the other hand, if you’re calculating RRR based on the slowest periods, your RRR is likely to be lower than your typical recurring revenue.
- Churn rates: RRR doesn’t take into account churn rates which impacts revenue in SaaS businesses. If a bunch of customers cancel their subscriptions without a corresponding increase in new business, your RRR may not accurately predict revenue.
- Changes in business performance: the RRR calculation assumes that the business will continue to earn revenue at the current rate which is often not the case. For example, RRR doesn’t take into account fluctuations in sales, meaning the data it generates can easily be skewed, inflated or inaccurate.
When is RRR a useful financial metric?Link to this section
Despite the limitations of using RRR, there are still a handful of cases when RRR is a useful metric in understanding and measuring business performance and predicting recurring revenue.
- New businesses: for businesses in their early stages, RRR can be a useful metric in understanding financial performance. New businesses may not have a full year of revenue to measure, meaning RRR can be a useful indicator of expected performance.
- Understanding changes in the business: RRR can be a useful indicator of changes happening in the business. For example, data can be used before and after changes are made (like price increases) to understand whether the RRR was affected in a positive or negative way.
While RRR can be a useful metric in providing a snapshot of business performance and predicting incoming revenue, it’s important to remember that RRR shouldn’t be used as the only measure of business performance. To get a granular view of financial health, RRR can be used in combination with other metrics like ARR to boost accuracy.
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