If you have worked in asset management or venture capitalist firm, you must have come across the word '' Run rate''. It's common in the valuation field. You would hardly meet any startup founder that doesn't know what a run rate is.
Run rate is predicting the future performance of a company using current financial information. Let me explain what it means in real terms. Just imagine it takes 50 Naira to produce shoes monthly. So, an investor comes in and decides to invest N500. But before he agrees to the term on the valuation sheet, he asked, “if all things remain equal, how long will it take you to spend this N500?” So, you divided the 500 by 50 and arrive at 10 months. The 10 months is your run rate. If you make an average sale of 20 Naira monthly. If you are asked, what's your 1-year run rate?? Just simply multiply your sales of 20 Naira by 12 months. It means that's how long it will take you to utilize the invested capital.
So, in another instance, if it takes 100 Naira to produce a bag and you get pre-seed funding of 1000 naira. If nothing changes, how many bags can you produce?? 10 yeah?? That's your run rate.
This is where I am going today. To arrive at the 10, all you did was divide your income by your cost. It means the more income you have as long as your cost doesn't increase, you have an extended run rate.
Let's use a life product: Take, for example, Microsoft. It sells the same software that everyone subscribes to monthly. So, it means that their fixed costs remain the same yet their sales keep increasing.
Another example is a food joint like Iya Bisi food canteen, that sells cooked meals every day for people. If Iya Bisi secures a deal to produce a large quantity for a rally. Iya Bisi will gain more from the bulk sales compared to the daily sales. Why?? Her fixed cost is fixed cost. No extra cost on electricity, cooking utensils, or building. So, her profit margin has relatively increased because some of her costs are fixed.
This simple concept is important to all businesses. A thriving business pursues income that won't necessarily increase its costs. That's why you will see businesses share outlets ( Mr Bigg's and Debonairs, Chicken Republic and Pie Express, Domino and Coldstone).
Beyond sharing of costs, it's better to look for a business line that will grow your revenue exponentially and your cost by a fraction. One secret of a high-flying business is the ability to increase revenue while incurring the same (fixed) cost.
How do you increase your run rate:
Learn to seek collaboration
Understand your business model
Learn from competitors.
Know your business margins
Understand your industry
Let me know if your find this information useful.
Cheers to a profitable lifestyle,
TL.