Recently, we outlined 10 key subscription billing metrics businesses need to track. Today, we’re going to unpack one of the most critical: annual recurring revenue, or ARR. This is a foundational subscription billing metric, as it indicates how much revenue a company — and its investors — can expect from subscription customers each year. In its most basic form, the calculation is straightforward: the number of customers multiplied by the amount they pay per year for their subscription. For the sake of easy math, let’s say you have 100 customers subscribed to your offerings at $49.99 per month. Over the course of the year, each customer pays $49.99 x 12, or $599.88. Multiply that by 100 customers, and your ARR comes out to $59,988 per year. With different products, pricing, and contract lengths, you can see how this calculation can become more complex.

Why Is ARR Important?

ARR provides a big-picture look at a company’s expected revenue and profits that can be used to support annual forecasting in order to make informed business decisions around marketing, research and development, sales, etc., and to help investors track long-term growth prospects. When it comes to tracking ARR, there are three key goals and benefits:

Quantifying Growth

By tracking the ARR continuously over a period of several years, businesses can put together a clear, accurate at-a-glance look at their growth trajectories that removes unsustainable one-time purchases. Are they bringing in more revenue each year? Have they seen a decline in recent years? This view makes it easy for both internal decision makers and investors to tell right away whether the company’s roadmap is on the right track, and whether the decisions leaders are making are paying off.

Forecasting Revenue

The ARR, a calculation of how much money a business anticipates bringing in based on how many subscribers are currently contracted, is a useful tool for projecting revenue, and it can be used in combination with other formulas to make powerful financial predictions that guide decision-making throughout the company. For example, combine ARR with average annual user growth to make predictions for three to five years (or more) down the road, or combine it with costs per user to quantify margins and adjust pricing or expenses as necessary. You see the pattern — ARR is an important piece of the financial puzzle.

Refining the Business Model

Finally, as a measure of recurring revenue only (as opposed to all incoming cash), the ARR is a useful tool in determining whether the subscription model is working the way it should and identifying opportunities to grow revenue. These could include revising subscription offerings or adding usage-based models on top of them in order to capture cross-sell and upsell opportunities and encourage new clients to dip a toe in the water. By consistently using ARR to measure the strength of the business model, decision makers give themselves an important advantage: the knowledge of what’s working, what could be better, and how to improve it.

Getting Clear on ARR

It’s important for companies to have a clear, up to date understanding of the overall health of their finances, and this is especially true in a landscape where every market is saturated, both customers and investors have more options than ever, and the ability to pivot or course correct quickly is paramount not only to success but to survival. And for that clear picture of business health, ARR is one of the most important metrics to track. So how can businesses track that metric effectively? A sophisticated billing platform is a big help here. Manual tracking may seem straightforward, but how about keeping up with contracts as the business grows? What about differing subscription terms, start dates, discounts or special rates? What about sudden influxes of new clients (or periods of high churn)?

While manual or outdated billing processes are unlikely to be able to keep pace with added volume and complexity, a sophisticated agile billing platform is built specifically to do just that. Not only can it maintain up-to-the-minute ARR calculations, but it can help ensure those projections are accurate by automating every facet of subscription and billing management, from renewals to invoicing to collections and dunning to reporting, in order to minimize churn and revenue leakage — without monopolizing the finance team’s every second and every ounce of energy.

At Gotransverse, we pride ourselves on making recurring billing a snap, providing the automation, transparency, and flexibility that empowers our clients to stay ahead in their competitive markets. To learn more, take a virtual tour of our billing platform today. Then, when you’re ready, request a demo to find out whether Gotransverse is the right billing partner for your organization.