What is Annual Run Rate?
Annual Run Rate is the yearly version of MRR or Monthly Recurring Revenue. ARR helps project future revenue for the year, based on your current monthly revenue. It assumes nothing changes in the year ahead – no churn, no new customers and no expansion.
While this might seem unrealistic in practice, ARR is a helpful tool to predict long term growth and visualize the size of your business. If you hear someone say they have a $1M business, they are likely referring to having $1M ARR. This means at the current rate, they will bring in $1M in recurring revenue this year.
To calculate ARR just annualize your MRR – simply multiply your current MRR by 12. If your MRR for last month was $100k, your ARR is currently $1.2M.
You can see our real live ARR stats in our Baremetrics dashboard.
The Problem with Run Rates
The biggest issue with calculating ARR by multiplying one month’s revenue is the volatility of month to month sales. If you’re a seasonal business, your ARR will look a lot better if calculated on a busy month’s MRR. This same issue happens if you sign a big customer one month.
In order to smooth out variations from month to month, some companies may calculate ARR based on their quarterly MRR, ie. multiply the total recurring revenue from a quarter by four. Instead of looking at just one number for ARR, it’s most important to look at the trend over time to see how fast a company is growing.
Nitty Gritty Calculation Details
First, a note on accrual accounting. Accrual accounting is an accounting method that recognizes economic events separately from when the cash is collected. It’s based on matching expenses and revenues in the month where they actually occur. For example – if you’ve signed an annual subscription, you’ll realize 1/12th of the contract value in each month of their subscription. This means you don’t account for the revenue until the service is provided. It provides a much more realistic picture of where a business stands month to month.
ARR, like MRR, is calculated on earned revenue. If you sell an annual contract, you won’t include the full revenue amount in the month it was sold. You also won’t include one-off payments, because they aren’t expected recurring revenue.
ARR is just MRR multiplied
We won’t go into too much detail about ARR, because we’ve written the book on MRR and it’s really not much different!
Dive into our guide on MRR to learn how to grow ARR, and what mistakes you might be making.