In the finance function, ARR is used in or to:
Report on growth from new contracts, including those with different term lengths
Report on net & gross expansion and contraction from existing customers
Assess trends in ASP (average selling price)
Report on Cohorts (typically by customer start month, quarter, or year)
Estimate future GAAP revenue
Is there a CARR equivalent to CMRR?
Contracted Monthly Recurring Revenue (CMRR) is the value of the contracted MRR from the booking date through the subscription end date. It’s often used by term subscription businesses with gaps between order date and subscription go-live dates (due to onboarding or simply contract language).
Is there a CARR metric equivalent? There is no reason you can’t track and measure CARR, but it is not a common term. A Google search for CMRR shows plenty of relevant hits, but if you try CARR or “CARR Subscription Metric,” you won’t find much.
ARR reporting in spreadsheets
While ARR does approximate revenue, it is still a normalization value, so you’ll be hard-pressed to find an ARR data field or function in any GL or finance system.
Few billing platforms include ARR, favoring MRR if they have either (though Maxio maintains both MRR and ARR).
Unless your finance system has a rev rec module, it won’t have a Contract Object, and will likely not track subscription start and end dates. This means “cancellation” actions and churn are challenging to report on in your finance system.
Without support for ARR and cancellations in your finance system, most turn to Excel to track and measure ARR and churn.
To perform core ARR calculations, it is easiest to start with a simple “status” or state spreadsheet including the basic information needed to report on the present state of each contract or subscription. This approach works well for a few dozen customers, but its value quickly evaporates as a company grows.
If you’re interested in setting up quick ARR and reports for your business, Maxio’s free downloadable metrics template is a great place to start.
Get Your Free SaaS Metrics Template
Ultimately, this approach doesn’t provide information to report on changes, and what is fundamentally interesting about a subscription company is the change or rate of change.
Using spreadsheets to track subscription actions
Most organizations move to a transaction or subscription ledger approach in very short order. This approach mimics a simple database that captures each subscription action (new booking, upgrade, renewal) as a record in the spreadsheet.
To calculate ARR churn, you also need to report on cancellations (essentially the absence of a renewal). However, measuring a cancellation using an “absence of data” is extremely difficult in Excel. In other words, you need some form of measurable cancellation record.
You can either tag transactions to indicate the transaction did not renew or add a cancellation transaction with a value (for bookings loss) and an ARR value.
The best-practice approach to create cancellation records is to record the cancellation in the same period as you would record it if it were a renewal. Doing so enables you to consistently measure renewals and churn, a mathematical must since churn is simply (1 – renewal rate).
Let’s say a subscription ends on July 31. If it renews, the new term’s start date is August 1, therefore the renewal date for ARR calculations is August 1. If it cancels, you may be tempted to report the cancellation as the date of cancellation. However, in doing so, you’re reporting the cancellation in a different period. The cancellation should be recorded on Aug 1, the end date of the subscription (i.e. the renewal period).
A typical ARR performance report includes ARR totals broken out by the following classes: New, Renewal, Expansion/Upgrade, Contraction/Downgrade, and Lost, as shown in the Maxio ARR Momentum Report above.
While the data management and .xls formulas become increasingly complicated as your business and reporting needs grow, calculation of New and Lost are typically the easiest and can usually be calculated using a data field or flag to indicate the class of a record.
In early-stage subscription model businesses, you can also use data fields/flags to indicate the class of a transaction. However, as the volume of data grows and the complexity of transactions increases, this becomes increasingly complicated.
Mid-term subscription changes for quantity, products, value, and term-end dates all create immediate havoc with the formulas used to calculate Expansion, Contraction, and Renewals in Excel.
Maxio’s subscription management function was designed to handle these complicated scenarios with ease and accuracy.