In this article, I’ll have a go at explaining a measure of business efficiency which I heard described by Nic Rixon (if you ever get a chance to see this guy, do it) in a business growth seminar, which he calls a “Run Rate”. The term Run Rate is normally used to describe a company’s revenue extrapolated over time, but as I can’t find another term for this measure I’ll use Run Rate for now.
Imagine if everything was running at maximum efficiency. If you charge by the hour, this means every employee who does chargeable hours is working all day every day. Enough sales are being made to keep everyone busy, client expectations are managed so they don’t keep calling, maintenance is low because quality is high, cash flow is easy because prices are right, and staff are productive because they know what needs doing, and have the tools to do it. Perhaps you’re purely selling time, in which case imagine you could work chargeable hours every day. What would your sales figure be? Put a realistic number on it.
Now, what are your sales currently? Take the past 6 months, for example. Perhaps discount any abnormal windfalls or writeoffs, unless they happen regularly. Divide that by the previous figure for the same time period. For example, if you did £50,000 in the past 6 months, but you could potentially be doing £15,000 per month, then you could potentially have done £90,000 in the same time period. £50,000 / £90,000 is 0.55, or 55%.