# Annual Run Rate (ARR): Definition, Calculation Formula & Guide

By Will Steward on Sun, Jul 14, 2024

When it comes to subscription businesses like SaaS companies, we hear about ARR all the time.

ARR stands for Annual Run Rate, and in this post I'll define it for you, show you the calculation formula and offer guidance on using it correctly, before wrapping up with a tip on how to avoid doing the manual calculations yourself.

## What is An Annual Run Rate, How is It Defined?

Annual Run Rate is an annualised version of your current Recurring Revenue, based on your actual historical recurring revenue over a given period of time (phew! It gets easier, read on).

It basically tells you what your future revenue for the year would be based on what you've earned in the past.

Annual Run Rate assumes that your business will not change at all during the year ahead. That is to say it assumes you won't lose any customers, gain any customers, or have any customers upgrade/downgrade to increase/decrease their spending with you.

## How to Calculate Your Annual Run Rate

Annual Run Rate is most commonly calculated by taking your Monthly Recurring Revenue (MRR for short) over a previous calendar month, and multiplying it out by twelve.

To calculate your MRR, simply sum up all of your Recurring Revenue during a particular calendar month (period t):

MRRtΣ Recurring Revenuet

To give an example, imagine you want to calculate your ARR based on your MRR for May, an earlier calendar month:

MRRMay = Σ Recurring RevenueMay

In May, you had a total of 5 customers, all on monthly contracts. 2 of those customers paid you $100 per month, and the other 3 customers paid you$200 per month.

You calculate your MRR as follows:

May: 100 + 100 + 200 + 200 + 200 = $800 MRR Once you have your MRRMay calculated, you then simply multiply it by 12 to calculate your Annual Run Rate for May: ARR =$800 MRR x 12 months = $9,600 Now, this all seems simple enough. Your ARR for May is$9,600.

For example, you probably don't only have monthly subscriptions, but other longer subscriptions too. How would you incorporate them into this calculation?

It's important you don't calculate what's known as Bookings, rather than your MRR for your ARR calculation.

### A More Complicated Example

Imagine that you landed two enterprise customers as well. 1 of those customers was on a 12 month upfront contract, paying you $24,000 per year, and signed up in March. The other customer was on a 24 month contract, paying you$48,000 per year, and they signed up in May.

How do you incorporate these into your MRR figure for May, to calculate your Annual Run Rate correctly?

Let's assume that all of your smaller accounts signed up before February. Your bookings look like this:

February: 100 + 100 + 200 + 200 + 200 = $800 March: 100 + 100 + 200 + 200 + 200 + 24,000 =$24,800
April: 100 + 100 + 200 + 200 + 200 = $800 May: 100 + 100 + 200 + 200 + 200 + 96,000 =$96,800

If you took that May figure, and multiplied it by 12, you'd have a figure of $1,161,600, but that's not right. It doesn't take account of the revenue from the other new customer in March, and it assumes you'll get a new 24 month enterprise customer paying the entire thing upfront every month as well. To calculate your MRR, you need to account for the length and timing of their subscriptions, by dividing each amount by the number of months in the contract and accounting for it moving forward: February: 100 + 100 + 200 + 200 + 200 =$800
March: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) = $2,800 April: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) =$2,800
May: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) + (96,000 / 24) = $6,800 June: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) + (96,000 / 24) =$6,800

This means your actual May ARR is $6,800 x 12 =$81,600.

When you don't have constant contract lengths for all your customers, calculating ARR can get complicated quite quickly, as the example above hopefully illustrates.

## Calculating Annual Run Rate from Different Time Periods

Your Annual Run Rate doesn't have to be calculated from your MRR, you can instead choose to calculate it from a different period, e.g. a quarter. This helps smooth out month-to-month changes in your MRR from new/lost customers, and upgrades/downgrades.

To calculate it for a generic period, you sum up your recurring revenue during the period in question, and multiply it by the number of periods there are in one year, as follows:

Σ Revenue t x periods t in 12 months = ARR

So if you imagine you want to calculate your ARR based on the revenue you earned in the last quarter (3 months), and your total recurring revenue in that period was $300,000, your calculation would be as follows:$300,000 x (12 / 3) = $1.2M Just remember that the guidance for your Bookings still applies. So to illustrate using the same "more complicated" example above, you'd calculate your ARR for Q2 (April, May, June) as follows: April: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) =$2,800
May: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) + (96,000 / 24) = $6,800 June: 100 + 100 + 200 + 200 + 200 + (24,000 / 12) + (96,000 / 24) =$6,800

Q2 total revenue = $2,800 +$6,800 + $6,800 =$16,400

ARR = $16,400 x 4 =$65,600

You'll notice it's lower, and that's because your second enterprise customer was only present for two thirds of the period, whereas in the previous MRR example, the second enterprise customer was present for the entire period.

What's best? Well, most SaaS companies track their monthly ARR over time, but it depends on the context of your calculation. If you want a one-off figure for the revenue health of your business, using a single month's numbers isn't great, as if you have lots of upgrades/downgrades/new customers/lost customers in that month, it skews your ARR calculation. In these "one-off" calculation situations, it makes sense to use a quarterly figure.

If you're plotting onto a graph over time, then the monthly figure will give you a more accurate insight into how your ARR is changing throughout the year, so you can identify insights into the way your ARR is changing to make better business decisions.

## How Smart Subscription Companies Calculate Their ARR

Imagine if you had tens, or even hundreds of customers on various different monthly, quarterly, and annual subscriptions... Calculating it all manually in a spreadsheet becomes a bit of a nightmare. You have to track contract start / end dates and more to get to your real ARR figure.

Rather than doing the calculations manually themselves or having an ever-growing complex spreadsheet which needs updating each month, smart subscription companies rely on a SaaS dashboard instead.

We recommend Baremetrics, which gives you a control center like this highlighting your most important metrics for you at a glance, so you don't have to manually calculate them yourself:

All you have to do is connect your billing software with Baremetrics, and it quickly shows you all your most relevant analytics. It integrates with most popular subscription billing software out of the box.

So that's it for our guide to Annual Run Rate. It's a simple metric on the surface, but less simple as soon as you have multi-term contracts to take into account. If you choose to try Baremetrics, let us know how you get on!