Five numbers, five questions
Recurring revenue is described in several ways, and mixing them up leads to confused board meetings.
- Monthly recurring revenue, or MRR, is the recurring revenue the business would earn in a month from its current customers.
- Annual recurring revenue, or ARR, is MRR times twelve: the run rate of subscriptions in force today.
- Annual contract value, or ACV, is the average annual value of a customer contract, including recurring fees but usually excluding one-time charges.
- Bookings are the contract value signed in a period, whether or not it has been billed or delivered.
- Billings are invoices issued in a period, which can include annual prepayments.
None of them is revenue
Revenue in the financial statements is what the company earned in the period, spread over the service period. ARR is a forward-looking run rate. Bookings are a sales number. Billings are an invoicing number. A company that signs a $120,000 annual contract in December and bills it up front has $120,000 of bookings and billings in December, $10,000 of MRR, and a small amount of revenue for the days of service delivered in December.
Reconcile MRR to the customer list
Each month, build MRR from the customer list: each active subscription, its price, and its billing interval converted to a month. Then bridge from last month: new customers, expansion, contraction, and churn. The ending MRR should equal the starting MRR plus movements. If it does not, the data has an error, such as a customer counted twice or a cancellation missed.
Compare MRR with the revenue in the ledger. They will not match exactly because of timing and one-time items, but the difference should be explainable.
Define it and keep it fixed
Decide whether usage fees, services, and discounts are in ARR, and write the definition down. Investors will compare your number from period to period, so a changing definition erodes trust. Say so when you change it and restate the earlier periods.
Frequently asked questions
Should one-time setup fees be in ARR?
Generally not. ARR is meant to show recurring revenue, so exclude one-time charges.
Is ARR the same as annual revenue?
No. ARR is the annualized run rate of current subscriptions. Annual revenue is what was earned over the past year.
What are billings used for?
Billings help show cash and deferred revenue trends, especially for companies that bill annually in advance.