Owner Earnings Run Rate (OERR) is an important financial metric used to estimate how much cash a company can generate per year by subtracting operational expenses from its revenue. The figure gathered from the calculation of OERR helps to determine the amount of cash a business has available each year, allowing those in a position to invest to make an informed decision on the potential profitability of a company.

The OERR is calculated by subtracting the operational expenses from the revenue and then dividing that figure by the number of months in the year. To calculate owner earnings run rate, one must first determine what costs should be subtracted from the revenue. Generally, this would include any interest payments, cost of goods sold, any employee-related costs, taxes and depreciation.

By looking at this metric, investors and lenders can estimate a company’s true profitability and the amount of cash that can be put to use for investment in other projects or daily operations. OERR is considered more reliable than some other bottom line metrics because it is calculated using actual cash flow and not just accounting entries.

In addition to investment decisions, OERR can also provide business owners and managers with insights into the efficiency and scalability of their operations. For example, if a business was planning to double its revenue but kept its expenses the same, the owner earnings run rate would remain unchanged. This would suggest that the business is not currently running efficiently and that further improvements could be made in order to increase the profitability of the business.

Overall, OERR is a helpful metric in understanding the profitability and cash flow of any given business. It can be used to determine the financial health of a company and help investors, lenders and business owners make informed decisions. It should be used in combination with other metrics to get a rounded understanding of a company’s financial situation.