Formula breakdown (transparent + practical)

At its core, ARR is just annualized recurring revenue. If your current monthly recurring revenue is MRR, then your run‑rate ARR is:

ARR = MRR × 12

That’s the “today” snapshot. But most people use ARR to answer a second question: “Where will ARR be if these levers keep happening every month?” For that, we do a month‑by‑month projection.

For each month, we update MRR using three ingredients: net‑new MRR, expansion, and churn.

MRR_next = MRR_now + NetNew + (MRR_now × Expansion%) − (MRR_now × Churn%)

Expansion and churn are applied to your current base (because they scale with size). Net‑new MRR is added as a fixed monthly amount (a simple “sales engine” assumption).

Many SaaS businesses raise prices periodically. If you enter an annual price increase, we apply it every 12 months inside the projection window: MRR = MRR × (1 + PriceIncrease%). If your horizon is 12 months, this mostly matters when you model 24+ months.

• Current ARR: today’s run‑rate (starting MRR × 12).
• Projected ARR: end‑of‑horizon run‑rate (ending MRR × 12).
• ARR growth %: projected vs current.
• Average ARR run‑rate: average monthly MRR over the horizon, annualized.
• Target gap: how far above/below your target ARR you land.
• Required monthly growth: the constant monthly growth rate needed to hit the target (if provided).

Note: This is a planning model, not an accounting model. It intentionally favors clarity over perfect realism.

Three scenarios (so it “clicks”)

Example 1: Simple MRR → ARR

If your MRR is $25,000, then your ARR is $25,000 × 12 = $300,000 ARR. That’s what most people mean when they say “we’re at $300k ARR.”

Example 2: Healthy growth with some churn

Suppose you start at $25,000 MRR, add $3,000 net‑new MRR each month, and your base expands 1.5% monthly while churn is 2.0% monthly. Net retention is slightly negative (expansion < churn), but your sales engine (net‑new) still pushes growth. Your projected ARR will rise mostly because you keep adding new MRR.

Example 3: Target‑driven planning

If you set a target ARR of $1,000,000 and a 12‑month horizon, the calculator will show the projected gap and estimate the monthly growth rate you’d need to hit that target from your starting MRR. That number is useful for sanity‑checking: “Is this target compatible with our pipeline and retention?”

If you want this to be more “real,” keep churn/expansion realistic and treat net‑new MRR like your pipeline output. Then adjust the horizon to match your planning cadence (12–18 months is common).

Planning workflow that founders actually use

Decide what “counts” as recurring for you. Many teams include subscription revenue and exclude one‑time setup fees. Consistency matters more than perfection — you want the same rules month to month.

Use the MRR you trust (from billing or your data warehouse). ARR = MRR × 12. That’s your baseline for investor updates, internal scoreboards, and goal setting.

If growth is happening, ask: is it primarily net‑new, expansion, or simply churn reduction? These levers behave very differently:

• Net‑new: usually needs pipeline, marketing, outbound, or partnerships.
• Expansion: needs customer success, product value, and pricing/packaging.
• Churn reduction: needs onboarding, reliability, support, and “time‑to‑value.”

Create three saved scenarios. Example: best‑case has lower churn and higher net‑new; worst‑case has slower sales and higher churn. This gives you a range instead of a single fragile number.

Targets become real when you translate them into monthly actions. If the required monthly growth is far above what you’ve historically achieved, you have three choices: increase net‑new, improve retention, or extend the timeline.

Frequently Asked Questions

• Is ARR the same as revenue?

  Not exactly. ARR is an annualized run‑rate of recurring revenue. It’s a snapshot. Accounting revenue depends on recognition rules and timing.

• What’s the difference between ARR and MRR?

  MRR is monthly recurring revenue. ARR is simply the annualized version: ARR = MRR × 12. Companies report both depending on audience and planning cadence.

• Should I include annual contracts?

  Usually yes, but normalize them to a monthly equivalent first. For example, a $12,000/year contract is $1,000 MRR (and $12,000 ARR).

• How do I choose churn and expansion rates?

  If you track them monthly, use the average of the last 3–6 months. If you track annually, convert to a monthly approximation. The goal is directional planning.

• What does “net‑new MRR” represent?

  It’s your sales engine output: new MRR added each month after cancellations/downgrades (separate from churn on the base). If you want to be stricter, reduce net‑new and increase churn — the model still works.

• Does this account for seasonality or ramp?

  No — it assumes constant monthly levers. For seasonality, create multiple scenarios (e.g., lower net‑new in slow months). Keeping the model simple makes it easier to explain to a team or investor.

• Is this useful for consulting / freelance businesses?

  Yes, if you sell retainers or recurring packages. Replace “MRR” with your average monthly retainer revenue. ARR becomes your annualized retainer run‑rate.

ARR mistakes that quietly wreck planning

ARR is simple — which is exactly why teams accidentally misuse it. Here are the most common traps, and how to avoid them.

• Mixing one‑time revenue into “recurring”: If onboarding fees sneak into MRR, ARR becomes inflated and your growth plan looks easier than it is. Keep “recurring” rules consistent.
• Confusing cash with ARR: Annual prepay can improve cash flow without changing ARR much (it changes collections, not necessarily run‑rate). Use a cash‑flow model alongside ARR for runway decisions.
• Ignoring retention quality: Two businesses can have the same ARR but totally different engines. Pair ARR with Net Revenue Retention (NRR) and Gross Revenue Retention (GRR) to see whether growth is sustainable.
• Over‑trusting a single forecast: ARR forecasts feel precise, but small assumption changes compound. Save three scenarios (best/base/worst) and plan around a range.

If you want a quick “executive dashboard,” use this stack: ARR (size), NRR (expansion vs churn), new ARR bookings (sales output), and gross margin (quality). When these move together, decisions get easier: invest more in acquisition when NRR is healthy; invest more in retention when churn is the bottleneck.

How investors often interpret ARR

Different investors emphasize different things, but these heuristics show up a lot in early‑stage conversations:

• ARR growth: Are you compounding, or linear?
• Retention: Is ARR “sticky,” or does it leak each month?
• Efficiency: How much spend (or time) does it take to add $1 of ARR?
• Focus: Can you explain your growth in one sentence with clear levers?

You don’t need perfect numbers — you need consistent definitions and a story that matches the data.

“ARR Reality Check” prompt

If you want to share your result, here’s a simple framing that tends to get replies:

• “We’re at X ARR today. If churn stays at Y% and we add $Z net‑new MRR/mo, we land at W ARR.”
• “Our gap to target is G. Required monthly growth is R%. Realistic or delusional?”

People love reacting to concrete numbers — especially when the assumptions are visible.