What is Annual Run Rate?
Annual run rate (ARR) is the projection of yearly revenue based on current monthly or quarterly revenue. It is also referred to as the run rate or revenue run rate. The ARR assumes all major factors remain constant i.e. no growth, no new customers and no churn. That is, you will collect the same revenue in coming months or quarters.
This assumption might sound unrealistic but the ARR is a helpful formula for predicting long term growth and envisaging the future size of the business. It is particularly useful for startups that don’t yet have a lot of revenue information to work with in creating realistic projections. The ARR could also come in handy when:
- Evaluating the impact of major business changes on revenue.
- Managing your business budget.
- Identifying future funding needs.
- Managing inventory.
To calculate the ARR, multiply your current monthly or quarterly rate by 12 or 4 respectively. For example, if last quarter’s revenue was $400,000, then the ARR will be $1.6 million.
The main drawback of the ARR as a metric is the volatility of month to month revenue. For businesses that have seasonal volatility, the ARR will seem most impressive when you use revenue from the busiest month or where a one-time transaction skews your numbers. Some businesses opt to use quarterly revenue as a more stable baseline. The more the revenue information you use, the more accurate the ARR is likely to be.
Annual run rate is not the same thing as annual recurring revenue despite the shared abbreviation. Annual recurring revenue only applies to subscription-style businesses such as SaaS applications. Run rate can be calculated by any company irrespective of their business model.