What is recurring revenue and should you track monthly or annual recurring revenues
Should you track monthly or annual recurring revenues?
Many SaaS businesses will operate with a subscription model, meaning that clients pay them a set fee each month or year; but which is the best way to track and predict your income – using annual recurring revenues or monthly recurring revenues? In this blog, we’ll explore the benefits of each to help you decide how to manage your business.
What is recurring revenue?
Recurring revenue is sales received from the same customer over and over again. The subscription model of doing business is widely embedded now, with consumers used to paying companies such as Netflix, Sky and Spotify each month for their entertainment services.
What is monthly recurring revenue?
Monthly recurring revenue, also known as MRR, is the total amount of money from subscriptions per month. The formula for monthly recurring revenue calculation is:
Monthly subscription price x Total customers = MRR
Let’s say your monthly subscription costs £19.99 and you have 5,000 subscribers, your monthly recurring revenue is £99,950.
Benefits of using recurring monthly revenue models
Monthly recurring revenue services such as the ones mentioned above create a predictable income stream which varies by customer numbers. It can give businesses an easy way to smooth out cashflow and to do more accurate sales forecasting. By charging customers on a monthly basis rather than all in one go, you can build up a relationship over time with the customer to create a higher chance of them being a customer for longer or opportunities to upgrade them to premium services or sell them new services alongside their existing subscription.
What are annual recurring revenues?
Annual recurring revenues are still subscription models, but customers are only billed once a year. Annual recurring revenue, also known as ARR is the total amount of money from subscriptions each year. The formula for annual recurring revenue calculation is:
Annual subscription price x Total customers = ARR
Let’s say your annual subscription costs £200 and you have 5,000 subscribers, your annual recurring revenue is £1,000,000.
Benefits of using recurring annual revenue models
Using annualised recurring revenue to manage your business reduces the administrative overhead in dealing with your subscribers as you only have to bill them once a year rather than 12 times. It reduces the scope for errors and increases the upfront cash flowing into your business. ARR is one of the key measures that potential investors will be looking for so it’s necessary to track it for your future growth and funding.
Calculating MRR during times of change
The above calculations are a simplistic view of how to calculate monthly and annual recurring revenues, but businesses are rarely this straightforward. You might offer a range of different packages at different prices and subscribers will come and go. To calculate your MRR more accurately you’ll need to account for upgrades, downgrades, new subs and those that cancel. Here’s how to do that:
Monthly recurring revenue at the beginning of the month
plus Revenue from new subscribers in the month
minus Revenue from subscribers lost in the month
plus Change in revenue from subscribers who upgraded in the month
minus Change in revenue from subscribers who downgraded in the month
equals Monthly recurring revenue at the end of the month
You’ll need to calculate this for each package separately before you can calculate your total MRR.
Calculating ARR from MRR
Simplistically you could multiple your MRR by 12 to give you an estimate of your ARR. However, this won’t take into consideration any of the events mentioned above and if you have any revenue generated from
one-time sales included in your MRR, this will distort your ARR figure.
Using MRR and ARR in your business
It can be time consuming to calculate your monthly recurring revenues and to work out your annual recurring revenues from your MRR. You may need support to decide the best way to track and forecast your revenues. David Masih, our client relationship partner can talk to you about which methods might work best for your business. We can support you with business advice, compliance & tax accounting and basic bookkeeping.
Call 03330 067 123 or email info@onthegoaccountants.co.uk.
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