Annual Revenue Run Rate (ARR) – Key Things to Know About It

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What is ARR?

The annual revenue run rate is the income you are expected to get in the upcoming months of the ongoing year. You can simply call it the yearly or annual version of monthly recurring revenue (MRR). It helps you predict your future revenue based on your current monthly revenue. Churn, MRR, customers, and expansions are assumed to be unchanged when we discuss ARR.

It may seem impractical in reality, but ARR is a valuable tool to foresee long-term growth and envision the size of your business. If you hear someone say they have a $2M ARR, this means they are expected to bring $2M in recurring revenue at the current rate.

As mentioned earlier, ARR is the annual version of MRR, so you can calculate it by multiplying MRR with 12 (annualizing MRR). Let’s say your SaaS company’s MRR for the last month is around $200K. So by multiplying it by 12, you will get the ARR which will be around $2.4M.

Problem You Face When Calculating ARR

The main issue with ARR is that month-to-month sales keep on fluctuating. If you are running a seasonal business, your calculated ARR will be maximum in peak months. Just like that, your ARR will be very high if you calculate in a month you get a big customer.

To smooth out these deviations, several SaaS companies calculate their ARR on their quarterly MRR. These companies multiply the total recurring revenue from a quarter by four. Instead of focusing on just one number for the annual revenue run rate, you should count on the trend over time to see how fast your business or company is progressing.

How to Calculate ARR-The Subtleties

Firstly, an idea about accrual accounting. It is an accouting method that acknowledges the economic events separately where the cash is undisturbed. It matches costs and gains in the month where they actually happen.

Example: After selling an annual subscription, you will earn 1/12th of the total value of the contract every month. It means, in accrual accounting, you don’t account for the revenue unless you provide the service. It provides a realistic picture of your firm’s monthly growth and development.

Similar to MRR, ARR is also calculated on the earned amount. You can calculate or add the full revenue amount in the month you signed the contract. Similarly, you would not include off-payments as these payments are not predicted recurring revenue.

ARR is Similar to MRR

As mentioned at the start, there are not so many differences between ARR and MRR. Knowing one, you can easily estimate the other and use this data to improve your business.