What is Annual Run Rate?
Annual Run Rate is the yearly version of MRR or Monthly Recurring Revenue. Annual Run Rate helps project future revenue for the year, based on your current monthly revenue. It assumes nothing changes in the year ahead – no churn, no new customers and no expansion. While this might seem unrealistic in practice, Annual Run Rate is a helpful tool to predict long term growth and visualize the size of your business. If you hear someone say they have a $1M business, they are likely referring to having $1M Annual Run Rate. This means at the current rate, they will bring in $1M in recurring revenue this year.
To calculate Annual Run Rate just annualize your MRR – simply multiply your current MRR by 12. If your MRR for last month was $100k, your Annual Run Rate is currently $1.2M.
You can see our real live Annual Run Rate stats in our Baremetrics dashboard.
The Problem with Annual Run Rates
The biggest issue with calculating Annual Run Rateby multiplying one month’s revenue is the volatility of month to month sales. If you’re a seasonal business, your Annual Run Ratewill look a lot better if calculated on a busy month’s MRR. This same issue happens if you sign a big customer one month.
In order to smooth out variations from month to month, some companies may calculate Annual Run Ratebased on their quarterly MRR, ie. multiply the total recurring revenue from a quarter by four. Instead of looking at just one number for Annual Run Rate, it’s most important to look at the trend over time to see how fast a company is growing.
How to Calculate Annual Run Rate – The Nitty Gritty Details
First, a note on accrual accounting. Accrual accounting is an accounting method that recognizes economic events separately from when the cash is collected. It’s based on matching expenses and revenues in the month where they actually occur. For example – if you’ve signed an annual subscription, you’ll realize 1/12th of the contract value in each month of their subscription. This means you don’t account for the revenue until the service is provided. It provides a much more realistic picture of where a business stands month to month.
Annual Run Rate, like MRR, is calculated on earned revenue. If you sell an annual contract, you won’t include the full revenue amount in the month it was sold. You also won’t include one-off payments, because they aren’t expected recurring revenue.
Annual Run Rate is just MRR multiplied
We won’t go into too much detail about Annual Run Rate, because we’ve written the book on MRR and it’s really not much different!
Dive into our guide on MRR to learn how to grow Annual Run Rate, and what mistakes you might be making.
What is the difference between MRR and Annual Run Rate ?In essence, MRR and Annual Run Rate are similar in that they both measure recurring revenue, but they do so over different timeframes: MRR does it monthly, and Annual Run Rate does it annually. Both are important for businesses with subscription models to track, as they provide insight into the predictable, recurring revenue of the business.
What is the problem with calculating Annual Run Rate based on one month's revenue?Calculating Annual Run Rate based on one month does not take into account the volatility of month-to-month sales which can significantly affect Annual Run Rate, especially for seasonal businesses or when a large customer is signed in a particular month.
How can companies smooth out variations in their Annual Run Rate from month to month?
To smooth out variations in Annual Run Rate from month to month, some companies choose to calculate their Annual Run Rate based on their quarterly Monthly Recurring Revenue (MRR). They do this by multiplying the total recurring revenue from a quarter by four. Instead of looking at just one number for Annual Run Rate, it's most important to look at the trend over time to see how fast a company is growing.
This method can help to reduce the impact of any significant fluctuations that may occur from one month to the next, which might distort the Annual Run Rate if calculated based on a single month's MRR. For example, if a company signs a large contract in one month, or if it's a seasonal business that has a particularly busy month, calculating the Annual Run Rate based on that month's MRR could give an inflated sense of the company's recurring revenue for the year.
What is accrual accounting and how does it relate to calculating Annual Run Rate?Accrual accounting recognizes economic events when they occur, not when cash is collected. For example, an annual subscription's revenue is divided over 12 months. This method gives a realistic business overview. Annual Run Rate, like MRR, is calculated based on this earned revenue, not including one-off payments. So, accrual accounting helps accurately reflect a company's financial standing and growth.
What is Annual Run Rate and how is it calculated?
Annual Run Rate is the yearly version of MRR or Monthly Recurring Revenue.
If you're wondering how to calculate Annual Run Rate, you simply annualize your Monthly Recurring Revenue by multiplying it by 12. For instance, if your MRR for the last month was $100k, your Annual Recurring Revenue would currently be $1.2M.