TL;DR: ARR is the annualised value of a company's recurring revenue, the portion of revenue a business expects to receive on a predictable, repeating basis. It is the primary sizing metric for SaaS and subscription businesses, and one of the key inputs management and investors use to evaluate growth-stage companies.
Annual Recurring Revenue (ARR) is calculated by taking a company's current recurring revenue run rate and expressing it on an annual basis. For a SaaS business, this typically means multiplying current monthly recurring revenue (MRR) by 12.
ARR excludes one-time fees, professional services revenue, and any non-recurring income. It reflects only the contracted, repeating portion of revenue; what the business can reliably expect to collect without winning new customers.
ARR is used by management, lenders and investors as a proxy for business scale and revenue quality. It is more informative than total revenue for growth-stage companies where one-time or lumpy revenue can distort the picture.
Venture debt lenders often size facilities as a multiple of ARR if they are lending to companies with high recurring revenue, like SaaS companies. Multiples could be as low as 1/3rd x ARR for smaller or earlier stage companies, to as high as 1.5x ARR for larger companies. Flow Capital, for example, typically provides loans of up to 1x ARR.
What is the difference between ARR and MRR? MRR is monthly recurring revenue. ARR is the annualised version (MRR x 12). Both measure the same underlying business, just at different time scales.
Does ARR include new bookings or only active contracts? ARR reflects currently active recurring contracts. New bookings are added when contracts start; churned customers are removed when contracts end.
Is ARR the same as revenue? No. ARR is a subset of total revenue, the recurring portion only. A company with $5M ARR may report higher or lower total revenue depending on one-time fees and professional services. Recognized revenue in a year will often be smaller than ARR, particularly in high growth companies as ARR is forward looking based on the current schedule of customers.
Related terms: Burn Rate
