In this guide
Annual recurring revenue (ARR) describes the subscription business at an annualised run rate. It is useful for discussing scale, but it becomes misleading when mixed with annual invoices, signed contract totals or a twelve-month forecast.
For the MRR-based definition used in this guide, ARR = selected-month MRR × 12. Stripe describes the same relationship in its recurring revenue definition. Document your own definition, especially when contracted commitments and current service activity differ.
All figures below are fictional and exclude tax. The examples explain the arithmetic rather than setting a benchmark.
How to calculate ARR from mixed billing terms
First put eligible recurring charges on a consistent monthly basis. Then annualise that result. Counting only customers billed annually would miss the annualised value of monthly subscriptions.
| Customer group | Recurring billing basis | Combined MRR | Annualised value |
|---|---|---|---|
| 50 customers | £100.00 each per month | £5,000.00 | £60,000.00 |
| 20 customers | £1,080.00 each per year | £1,800.00 | £21,600.00 |
| 10 customers | £300.00 each per quarter | £1,000.00 | £12,000.00 |
| Total | £7,800.00 | £93,600.00 |
The annual plan contributes £90.00 per customer per month, reflecting its contracted annual price. Replacing it with a higher monthly list price would manufacture ARR that the customer is not paying.
The MRR guide explains normalisation, recurring classifications and service-period coverage in more detail.
ARR versus annual revenue, bookings and cash
These measures answer different questions. Presenting them side by side is usually more useful than selecting whichever produces the largest number.
| Measure | What it describes | Why it can differ from ARR |
|---|---|---|
| ARR | Annualised recurring run rate at a specified date | A point-in-time measure under a defined policy |
| Recognised revenue | Revenue reported over an accounting period | Depends on performance obligations, timing and accounting treatment |
| Billings | Invoices and credits issued over a period | Includes billing timing and potentially non-recurring items |
| Cash collected | Money actually received | Depends on payment dates, arrears and prepayments |
| Bookings or total contract value | Value of signed commercial commitments under a stated definition | May include future starts, multiple years and one-time services |
| Revenue forecast | Expected future revenue over a period | Requires assumptions about renewals, new sales, churn and other changes |
If a customer signs a £36,000.00 three-year subscription with equal annual service value, the total commitment is £36,000.00. Under those assumptions its annualised recurring value is £12,000.00, not £36,000.00. Whether it belongs in a current-service ARR measure also depends on when service begins.
A ramped contract needs more care. A deal priced at £8,000.00 in year one and £12,000.00 in year two does not automatically have £12,000.00 of current ARR from the start. Specify whether you report current service run rate, contracted future run rate or another measure, and keep the labels distinct.
Explain ARR changes with a bridge
If ARR is derived consistently from MRR, its movement bridge follows the same structure. Each change below is an annualised change in recurring value.
| Movement | ARR impact |
|---|---|
| Opening ARR | £480,000.00 |
| New customers | +£81,600.00 |
| Expansion | +£28,800.00 |
| Reactivation | +£6,000.00 |
| Contraction | −£8,400.00 |
| Ended recurring service | −£18,000.00 |
| Closing ARR | £570,000.00 |
The increase is £90,000.00, or 18.75%. The closing balance corresponds to £47,500.00 of MRR. These annualised changes are not amounts invoiced or earned during the month.
An annualised £81,600.00 of new business also does not mean £81,600.00 will necessarily be earned in the remainder of the financial year. The forecast must reflect start dates, remaining months and the applicable revenue basis.
Why ARR alone is not enough for a pricing decision
Suppose a £100,000.00 ARR segment receives a modelled 10% price increase while retaining 95% of its billable volume. Under a deliberately simple unchanged-mix assumption:
Modelled ARR = £100,000.00 × 1.10 × 0.95 = £104,500.00.
That is a £4,500.00 increase, not £10,000.00. Retention here is an assumption, not an estimate inferred from the price change. Costs, phased renewals, discounts and contract restrictions can change the commercial outcome.
Use scenarios to make those assumptions visible. Pair ARR with customer and revenue churn, direct margins and cohort acquisition economics before recommending action.
Data checks for an ARR review
- Use one clear reporting date and a consistent month-end policy.
- Separate currencies or document how translation affects comparisons.
- Check that annual and quarterly charges are normalised before annualisation.
- Exclude one-time setup fees and tax from the recurring basis.
- Identify future-start contracts rather than silently combining them with current service.
- Check renewals, credits, duplicate lines and overlapping contract replacements.
- Report how much of the source data has a supported recurring classification and service term.
For a consultant, a small reconciliation note can prevent a lengthy discussion about why a billing export does not equal the reported ARR. Show the source measure, adjustments and resulting recurring basis.
ARR in Profitcura Revenue Intelligence
Profitcura Revenue Intelligence calculates ARR as selected-month eligible MRR multiplied by twelve. The recurring model relies on supported service history and explicit recurring classification; a minimal invoice-only upload does not establish ARR by itself.
The product's pricing scenarios use invoice billings and covered direct costs as their own evidence basis. Those outputs should not be relabelled as ARR or recognised revenue. Read the scope and assumptions when moving between a recurring dashboard and a pricing review.
Common ARR questions
Is ARR the same as last year's revenue?
No. ARR is an annualised position at a point in time. Last year's revenue is activity over a historical period, potentially including non-recurring business.
Do monthly customers contribute to ARR?
Yes, under an MRR-based ARR definition. Their eligible monthly recurring value is annualised; an annual billing contract is not required.
Does ARR guarantee revenue for the next year?
No. Renewals, customer changes and billing terms can alter the outcome. An explicit forecast should show those assumptions and the history supporting them.
Explore the Revenue Intelligence product, continue to retention cohort analysis, or request a product walkthrough. The product is in active development, with access and pilot terms agreed separately.