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What is a Run Rate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 September 2014
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In terms of business applications, a run rate is understood to be an evaluation of the current financial performance of a given company and projections for future operations or runs given the current set of circumstances. Projecting run rates can be helpful to business in many ways, including budgeting and scheduling labor and other resources to meet projected increases or decreases in overall productivity. The use of a run rate can also help in assessing the overall health of stock options issued by the company, and how those stocks will perform in future periods.

Essentially, a run rate involves defining recent performance as a means of projecting the anticipated future performances associated with upcoming time periods of the same duration. Intrinsic to the formula of a run rate is making an assumption that the business can be expected to continue performing at the same level as the current period. For example, if the semi-annual financial report indicates a company made a net profit of ten million dollars during the first six months of the year, it could be said that the company is functioning at an annual run rate of twenty million dollars.

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The basic structure of the run rate is very simple, and does not take into account a number of variables that could impact a company’s performance. First, it does not take into consideration seasonal changes in consumer demands. This can be especially true for retail businesses, where specific times of the calendar year are well known to generate higher levels of revenue than others.

Second, a run rate does not consider such factors as changes in the marketplace. Technology that is cutting edge today could be obsolete within a year, thus impacting the bottom line of a company that has continued to produce the older technology and is experiencing a reduced market share as a result. Last, this evaluation does not take into account political changes, and how that factor can impact consumer confidence and thus change the demand for goods and services.

Still, the run rate can be helpful within the context of assuming that all factors will remain equal. Planning budgets based on this rate, but also allowing some room for cuts or reallocations when circumstances change, is always a key function in planning a workable budget.

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subway11
Post 5

GreenWeaver-I think that the run rate for forecasting budgets and staffing should be revisited because we are living in very turbulent times.

The political climate is very much anti- business and the smart businesses should take future taxation into consideration when they are looking at staffing levels.

Many have and have eliminated jobs which have grown the unemployment rate levels. Businesses have had to lay off employees in efforts to budget for future tax increases. Many have abandoned the run rate for budgetary measures because there are too many unknown measures that will negatively affect businesses.

GreenWeaver
Post 4

Oasis11-I agree with you. For example, the corporate tax rate in the United States is among the highest in the world.

At 35% which is our current rate, Obama vows to raise that limit to 40% which would make the federal rate 40%.

This actually punishes business development, and the existing businesses would be foolish not to take these future tax measures into consideration.

Other countries want to encourage foreign business development by offering lower tax rates. In Great Britan, the corporate tax rate is 28%, while in Ireland it is only 2%.

This makes Ireland an attractive place to open a business, and many companies have moved their operations there, or have by passed the United States and gone to friendlier markets like these, in order to expand.

oasis11
Post 3

Sunshine31- Many businesses are seeing record losses because consumer confidence is way down and that due to that lack of confidence people have of the Obama administration.

His policies of punishing the successful businesses and continual governmental regulations have caused many businesses to rethink their future plans and curb hiring.

The constant uncertainty has also caused consumers to save their money rather than spend on goods and services that will fuel economic growth.

sunshine31
Post 2

Determining the run rate is helpful for providing the company some budgetary measures for scheduling staff.

However, so many variables are not taken into consideration that this method of forecasting might not be entirely accurate especially in today’s economic climate.

The run rate does not account for consumer confidence, nor does it look at the political climate of the country. These are both huge factors that are now looked at by many businesses.

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