The right metrics are crucial for the financial health of any business, large or small. Not only do you need the right tools, but you need proper context to make sense of the data. This is where net new annual recurring revenue comes into play.
Also known as ARR, annual recurring revenue is a metric that allows you to monitor the health of your business while also calculating the growth rate you should target in order to expand as you move into the future. Read on as our team at Intrepid Finance & Venture Co. examine the fundamentals of ARR, factors that affect ARR calculations, and why you should look into recurring revenue financing.
What Is Net New Annual Recurring Revenue?
Your ARR helps you measure your annual revenue based on subscriptions lost versus gained, allowing you to examine your overall growth and your potential to scale. Not only is ARR an essential metric for a business, but you can also use it to secure growth capital, equity financing, recurring revenue financing, or revenue loans.
How Do You Calculate ARR?
Your ARR calculation will remain unique to your business, thanks to the complex and detailed factors that feed data into the overall model. You’ll generally start by looking at the strategy you have in place for pricing, the complexity of your business model, and the scalability of your business over time.
When calculated properly, this metric can help you forecast growth and also adjust hiring accordingly. In general, you calculate net new annual recurring revenue by taking the amount of revenue you’ve gotten from upgrades and subscriptions and then deducting the revenue that went out due to customers canceling.
What Could Affect the Calculation?
Since your net new annual recurring revenue calculation is based on several metrics, changing any one of them will affect your calculation as a whole.
Any purchases that you’d consider to be an extension of a prior purchase should get factored in, and so should any kind of upgrade to an existing subscription.
Of course, just as you must adjust the calculation for positive changes, you also need to update it for things like downgrades and cancellations.
ARR vs. MRR
Both ARR and MRR (monthly recurring revenue) provides context and options for future growth, but the scale at which they present their data is far different. While ARR calculates yearly information, MRR looks at your company on a month-to-month basis.
Given that subscription businesses rely on recurring revenue, both models can provide value, with MRR giving a more immediate look at the financial wellbeing of the company and ARR giving more of a long-term outlook by contrast.
It’s good to regularly review both metrics, as MRR can allow you to see how small changes affect revenue-based financing and annual revenue in the short term, while ARR tends to point to more significant trends over time. You can think of MRR as weather and ARR as climate.
ARR works well for those executives who want to see where the company is at from a 30,000-foot perspective. Companies thinking of building an executive roadmap or planning a new product rollout need the kind of modeling that ARR provides.
MRR is excellent for those times when you need to dig into the data and see the smaller-scale changes that add up over time. It can be particularly helpful when you’re trying to see the effects of pricing increases or decreases. It can also give you a better concept of the health of your accounts and how their needs shift throughout the year.
With both ARR and MRR, you can remain informed whenever you need to make future plans and adjust for what’s to come.
Why You Need ARR
The only way to accurately check your business’s health is to have accurate and regularly-updated information. You need to know how your company is doing financially, what your goals are and how you’re doing in pursuing them.
You’ll also want to consider the products you offer, new features you might add in the near future, and ways to combat churn in your subscription base. ARR helps in all these avenues, and once you’ve got the formula down, you can simply adjust for new values as they arise.
Since ARR essentially checks the momentum of your business, you can use this metric to understand the best course for your business and accurately study the effects of any and all changes you might have made throughout the year.
It’s also essential to keep up with the latest terms and information in the financial services industry. To that end, our team at Intrepid Finance & Venture Co has put together a Resource Center that can help.
Forecast Your Future
While ARR is relatively simple as far as formulas go, you can easily use it to generate more complicated calculations in the future.
While you won’t be able to see every potential upturn or crash over time, having a firm grasp of your company’s ARR will get you as close to peering into the future as possible. You’ll be able to figure out what actions might help or hinder. You can adjust sales strategies, offer upsells, and use other tactics to make goals that you can achieve and which will lead to a positive outcome for your company.
Since your company is built around the number of subscriptions that you have, it’s imperative for you to be able to track every dollar amount for every subscription. Even immediate sales can be deceiving when you consider things like downgrades and cancellations, so you want to be sure that you have highly accurate information. It doesn’t serve you to oversell company performance here.
If you run a subscription-based business model, then you know how precarious revenue forecasting can be. If you need help with recurring revenue financing at any stage, our team at Intrepid Finance & Venture Co, LLC, in Indianapolis, IN, can help. Give us a call at 833.366.6396 today.