Forecasting SaaS MRR / ARR
Updated: Apr 4, 2022
Perhaps the single most important metric for a SaaS-based business is its MRR, which stands for Monthly Recurring Revenue and is similar to ARR, or Annual Recurring Revenue. The key word being 'recurring'. Recurring revenue provides stability for your business by giving you a baseline of how much you can expect to bring in every month. Knowing your MRR makes it easier to plan for the future and gives you, your investors, and your other stakeholders confidence in your business' continued viability.
MRR is not synonymous with revenue, as there are several sources of income that do not count towards MRR. For example, when you sign up a new client and offer an implementation fee or onboarding fee, or offer other types of one-off services, that revenue would not fall under MRR.
The key difference between MRR and ARR is that for MRR the contract is one month, which would auto renew the next month. While in the case of ARR, the contract is for 12 months and would auto renew at the end of the 12 month period.
Another reason MRR may differ from revenue is because oftentimes a client might sign up in the middle of the month. For example, if a client agrees to pay you $1,000 every single month and signs up on the 15th of the month, technically your revenue should only be half that amount for the initial month. But your MRR will still be $1,000, i.e. the amount that they agreed for each month.
Track your Movements in MRR
While MRR should be one of your top KPIs, it's not enough to just report on what your ending MRR is.
Starting with your opening MRR, for each period you'll want to understand how the MRR amount fluctuates by four key factors:
All new contracts closed that month
All contracts up for renewal that month that didn't renew, or churned
All contracts that were expanded at a higher rate
All contracts which renewed at a lower rate.
The sum of these will then equal your Ending MRR.
Let's go over an example.
You can see how this company's MRR is trending upwards due to larger movements in their new and expanding contracts compared to their lost and contracting contracts.
This correlates with the number of clients, which includes the new and lost categories, but provides more nuance by also including clients you're keeping but at higher or lower rates.
Start with your Actuals
To begin forecasting, the best thing to do is to start with your current MRR. Then look to see how the new, lost, expanded, and contracted categories are changing each month. From that, you can understand what percentage of your opening MRR each month is going towards each category.
You can then start using these percentages to insert into your forecast.
For example, you may see that while normally you bring in about 4% of your total beginning MRR in new contracts each month, lately you've been growing even faster at 10% each month. Updating the assumptions in your forecast shows the impact this increased closing rate has on your MRR growth.
You can then update this information every single month to capture your current trajectory.
And as with all things related to a budget, your best projections are the ones that mimic a similar trend in the past.
Starting with your past and showing how it will migrate into the future is a very convincing story to tell with your SaaS MRR, and makes your predictions of future growth that much more valid.
Tracking MRR Properly
One of the biggest challenges with this process is that it may be difficult for your startup to understand what exactly are the movements in your MRR?
Remember, your MRR is not something that you would find in your financial statements. It is something that you need to calculate separately.
That's why we created a free SaaS MRR & ARR Template, to make it easier for you to start tracking this vital information. And not only tracking actual MRR & ARR, but forecasting future performance.
However, once you get a large number of clients, perhaps around 100 contracts or more, tracking in Excel becomes cumbersome and challenging. At that point, we recommend using a program like SaaS Optics to manage. SaaS Optics is a platform that allows you to manage all of your contracts, allowing you to then see all the movements in each of your contracts and how they are affected by your MRR.
In the meantime, feel free to download our SaaS MRR & ARR Template, and we hope it provides valuable insight as you enjoy watching your MRR grow every month!
Josh Aharonoff CEO and Outsourced CFO
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