It is often important for a business to be able to evaluate their current performance and make predictions about the future. This is where the run rate enters the picture. It is a method by which a business will be able to evaluate their current position. This information can be used to evaluate the worth of any stock the company has. It is also very important when it comes to making important decisions in regards to budgeting. A company will have many resources at their disposal and the run rate can give an indication about whether these are being used efficiently.
How the Run Rate is Obtained
The run rate uses a formula that examines current performance and it also makes predictions about the future. It is based on an assumption that because the business has been performing at a certain rate that it will continue to do so in the immediate future. Of course, this means that such information will not be 100% reliable. It can be highly useful though, and this is why businesses will consider the run rate when deciding on important decisions.
The Limits of the Run Rate
The run rate is a formula that doesn’t take into account a number of different factors. One of the most important factors that it doesn’t include is the reality that demand for products and services tend to be seasonal. The run rate is usually produced half way through the year; it will use the performance of the company in the first half of the year to predict the second half. This might work well for some types of businesses but for others it will mean a misleading prediction. A good example of this would be a toy company that sells most of their products at Christmas time. It is likely that a run rate based on performance of the company in the first half of year will not be a reliable indicator for the second half of the year.
Another problem with the run rate is that it fails to take into account the whims of customers. Demand for products can go up and down depending on changes in the marketplace. Customers tend to be fickle and there is no guarantee that just because they both a product one time that they will want to keep buying it in the future. If a better product comes along in the future then this may attract many customers. If there are changes in the economy then this mean that people will have less money to spend. None of these factors can be predicted by the run rate.
Despite the limitations of the run rate it can be a very useful tool. This is why most businesses will continue to rely on it. So long as the limitations of such calculations are understood it will mean that business owners will be able to make wise decisions based on them. Sometimes the rate run will turn out to be way off the mark, but it is better to rely on it than pure guess work.
