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 Annual 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.
How to Calculate ARR – The Nitty Gritty 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.
What is the difference between MRR and ARR?In essence, MRR and ARR are similar in that they both measure recurring revenue, but they do so over different timeframes: MRR does it monthly, and ARR does it annually. Both are important for businesses with subscription models to track, as they provide insight into the predictable, recurring revenue of the business.
What is the problem with calculating ARR based on one month's revenue?Calculating ARR (Annunal Run Rate) based on one month does not take into account the volatility of month-to-month sales which can significantly affect ARR, especially for seasonal businesses or when a large customer is signed in a particular month.
How can companies smooth out variations in their ARR from month to month?
To smooth out variations in Annual Run Rate (ARR) from month to month, some companies choose to calculate their ARR based on their quarterly Monthly Recurring Revenue (MRR). They do this by multiplying 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.
This method can help to reduce the impact of any significant fluctuations that may occur from one month to the next, which might distort the ARR if calculated based on a single month's MRR. For example, if a company signs a large contract in one month, or if it's a seasonal business that has a particularly busy month, calculating the ARR based on that month's MRR could give an inflated sense of the company's recurring revenue for the year.
What is accrual accounting and how does it relate to calculating ARR?Accrual accounting recognizes economic events when they occur, not when cash is collected. For example, an annual subscription's revenue is divided over 12 months. This method gives a realistic business overview. ARR, like MRR, is calculated based on this earned revenue, not including one-off payments. So, accrual accounting helps accurately reflect a company's financial standing and growth.
What is Annual Run Rate and how is it calculated?
Annual Run Rate (ARR) is the yearly version of Monthly Recurring Revenue (MRR). It helps project future revenue for the year, based on the current monthly revenue. The ARR assumes that nothing will change in the year ahead – no churn, no new customers, and no expansion. While this might seem unrealistic, ARR is a useful tool to predict long-term growth and visualize the size of your business.
To calculate ARR, you simply annualize your MRR by multiplying it by 12. For instance, if your MRR for the last month was $100k, your ARR would currently be $1.2M.