When an organization is looking to grow, they need to know how much revenue they can expect for a future period. This revenue forecast is also known as the revenue run rate. The first step in calculating your company’s revenue run rate is determining what your company’s growth rate will be over the next year.
Once you have this information, you can calculate your forecasted profit and loss by multiplying the profit margin by the forecasted revenue. The result should exceed the forecasted expenses because if it doesn’t, then your company is going to have a huge problem. In order to calculate a realistic budget, you need to have an accurate revenue run rate. Here are some steps on how to do this:
What Is Revenue Run Rate?
How much revenue do you expect to bring in by the end of this year? How about the next year?
To determine this, you should also consider making up a forecast for the company’s growth. Maybe you want to grow sales by 10% over the next 12 months. Divide your expected sales by 12 to get an annual growth rate. Another way is to take the percentage increase in sales and divide that by the number of months you expect your sales to increase.
You can also look at the profit margin of your company and divide that by your budget to get a profit margin. Using these calculations, you should be able to determine what your run rate revenue is for the next year.
Why You Need To Know Your Revenue Run Rate
Knowing your revenue run rate makes it much easier to be realistic with budget when you have a real idea of how much revenue you will be able to generate in the future. If your revenue run rate is less than what you expect you are going to have to try to find new ways to make the shortfall up.
Determining Your Budget
When you are looking at how much profit your company will make, it is important to decide what type of budget you are going to need to have. The first way to do this is to make a budget of what you think your company’s expenses will be. Determine how much money you can put into each line item in the budget. You need to make sure that you are going to be able to spend more than you are taking in each month.
If you don’t do this, then your company will be in a huge financial trouble. The idea is to determine the level of profitability you can expect from your company. This will determine what the forecasted profit and loss will be.
Determining Your Growth Rate
A business is growing if its sales have increased, the business is becoming more profitable, and the product or service the company is selling is performing well in the market. If your revenue run rate is larger than your revenue forecast, then you are in growth mode and your company will need to have an aggressive approach to sales and marketing to grow. If your run rate is smaller than the revenue forecast, then you’re in neutral or survival mode. In survival mode, the company can’t perform as well as they could if their sales were stronger.
As such, it is important that you understand what kind of growth you are expecting for your company. For example, if you are expanding your ecommerce business into physical retail, you will need to invest more in inventory. As such, it’s important to make sure your revenue forecast reflects this.
Conclusion
In order to increase revenue and not burn out your company, the correct calculation is to know what your company’s revenue run rate is. Without this information, you can’t calculate a realistic budget. If you want to increase revenue, the best place to start is by having a solid understanding of what your company’s run rate is.
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