Annual Recurring Revenue

Accounting revenue for a year is the sum of money that actually arrived over the last twelve months. For a company that sells something once, that sum is the size of the business. For a SaaS company billing every month, the same sum understates the present badly. SaaS is software rented by subscription rather than installed and sold, so a customer who signs up keeps paying the same amount month after month.

Pagedeck ran into this. Money that landed in the bank last year came to $280,000, but December alone brought in $40,000. Customers had been arriving all year, so the early months were small and the late months were large. When Grace told investors "last year we did $280,000," they heard a company half the size of the one in front of them. She had answered a question about the present with an average of the past.

Annual recurring revenue (ARR) answers that question in the present tense. Instead of looking back over a year, it takes this month's run rate and extends it across twelve months. It describes the contracts on the books right now rather than a record of what already happened, which is why a growing company sees it diverge sharply from accounting revenue.

Multiply this month's monthly recurring revenue (MRR) by twelve. MRR of $40,000 gives ARR of $480,000.

Almost all the work happens before the multiplication, because the word recurring filters things out.

1. Keep only amounts that will repeat. Setup fees, data migration charges, and training sessions come out. A $15,000 implementation fee that arrives once becomes an imaginary $180,000 the moment it survives into the multiplication.
2. Spread annual contracts across twelve months and count one month of each. A customer who prepays $9,600 for the year contributes $800 this month. A two-year deal worth $19,200 works out to the same $800.
3. Reflect discounts and cancellations. Use what is actually invoiced rather than list price, and once a customer gives notice, count them through the end of their term and not past it.

Multiply after that cleanup. Converting each contract to an annual figure and adding them up gives the same answer, and that route is easier for businesses built on annual enterprise deals: 100 accounts averaging $4,800 a year also come to $480,000.

Sales tax stays out, since the company collects it and passes it straight through. Revenue from usage-based pricing, where customers pay for what they consume, gets handled differently from company to company. Some include only the portion that shows up reliably every month, others use a trailing average. Either is defensible as long as the choice is written down and applied the same way every month.

Size alone is neither good nor bad. The same $480,000 means one thing if the figure was $160,000 a year ago and something else entirely if it was $465,000. The first number anyone attaches to it is the same month last year. Early on, two to three times a year is the rough expectation; once a company is larger, 40 to 50 percent a year is the more common line.

Growth rate on its own is half the picture. Triple the ad budget and the rate climbs while the company runs out of money faster. The Rule of 40 adds growth rate and profit margin and asks whether the sum clears 40, which is a demand to put both on the same screen. Seventy percent growth at minus 20 percent margin sums to 50 and passes. Twenty percent growth at minus 30 percent margin sums to minus 10 and isn't explained by either side.

Who is paying matters too. If $160,000 of that $480,000 comes from a single account, the day that account leaves the company loses a third of itself. Revenue piled onto a few customers like this is called customer concentration risk, and due diligence asks separately what share the top five accounts represent.

"We're at $480,000 in ARR, and we were at $160,000 this time last year."

Size and speed in one sentence. Size alone leaves out half the information.

"If that $480,000 includes the $60,000 implementation fee, send it again without it."

Checking whether anything non-repeating slipped into the figure.

"Let's agree on ARR or MRR before we start."

The two say the same thing in different units, and mixing them makes the business look twelve times larger or smaller than it is.

At Pagedeck the number is locked once, in the first week of each month. Sofia hands over the deals signed and the cancellations received, Grace strips out implementation fees and sales tax, settles MRR, and multiplies. That figure opens the board deck, and hiring plans and the timing of the next funding round move with it.

Once locked, it doesn't change. A large deal landing mid-month waits for the next lock. If the moment of counting drifts, this month can't be compared with last month, and nobody can tell a real increase from a change in method.

The most common mistake is treating it as last year's revenue. Both are annual money figures, so they look interchangeable. One is a record of cash that arrived, though, and the other is an estimate that stretches today's rate across a year. Plan taxes or spending against them as if they were the same and the company starts treating money that hasn't arrived as money it has — a gap that widens the more customers pay month to month.

Reading a big number as a full bank account is the other one. ARR is what is expected to arrive over the coming year, not what is sitting in the account. With mostly monthly billing, $480,000 of ARR arrives $40,000 at a time. Spend $65,000 a month against that and the company is running dry whether the headline says $480,000 or $960,000. Size and remaining cash are counted separately.