What is Run Rate?
The run rate concept refers to the extrapolation of financial results into future periods. For example, a company could report to its investors that its sales in the latest quarter were $5,000,000, which translates into an annual run rate of $20,000,000. It is based on the assumption that current results will continue into the future.
When to Use a Run Rate
Run rates can be used in a number of situations. For example, it can be used to extrapolate financial results by the seller of a business when attempting to obtain the highest possible price for the entity. A high price may be obtained when the price is based on a multiple of sales. Another possibility is to extrapolate current results into future periods as part of the budgeting process. This works well in an operating environment that does not change much from period to period. A third possible use is to extrapolate current results when a business first earns a profit, since only losses were incurred in prior periods. This is useful for a startup company, which wants to show investors the rate at which it is now making money.
