What is Recurring Revenue and why it Matters

Revenue is a well defined accounting term. Recurring Revenue is a very useful idea, but its definition varies from company to company. Instead of thinking about accounting principles and GaaP, consider what you would expect the customer to pay at renewal.

Aside – ARR or MRR?

Some companies report numbers in terms of Monthly Recurring Revenue, others use Annual Recurring Revenue. Often, companies start out self serve and think in terms of monthly numbers, and then when they have a sales team, they transition over to annualized numbers as contract lengths increase. We picked Annual Recurring Revenue because either one is fine, it is switching between them, or worse, switching definitions, that will make it hard to analyze your business.

If you don’t know what to pick, pick Annual Recurring Revenue, but whichever way you go, stick with it.

How to Calculate Recurring Revenue

Since it isn’t a legal term, there are many different definitions of revenue. Your definition has far reaching impacts, such as how long you have to sign a renewal before it is counted as churn, and it trials can look strange in your numbers. Our definition is a very normal trade off for a Saas Company.

A contract will have recurring revenue during a month if the first day of the month is covered by the contract period.

When we are looking at a month, we always look from the point of view of the last day of the month. On that day, we ask, did we have Revenue on the first day?

Let’s say we sign a deal with Acme Inc. for $24,000 to provide them for service from March 28th until June 27th. Our ledger should look like this –

Month ARR New Churn
April $96,000 $96,000 $0
May $96,000 $0 $0
June $96,000 $0 $0
July $0 $0 $96,000

We count the revenue first in April, and since we didn’t have revenue the previous month, we have New revenue. In July, we count it as Churn to remind ourselves that we have until July 31st to have the signed contract in place before we report a churn number.

Calculating this is tricky, but it is important, it keeps everyone comparing the same numbers, while still having nice features such as a built in grace period for renewals to close.