Why annual recurring revenue (ARR) matters to a first-time founder
ARR gives you one yearly figure for your repeating income that you can track month by month, so you can see whether the subscription business is growing, flat or shrinking. Investors in subscription companies use it to judge size and growth. It is not cash collected this year, so plan spending from your cash forecast, not from ARR, or you may spend money you have not yet received.
Examples of annual recurring revenue (ARR)
Ten freelancers pay €20 a month. ARR is €2,400. If two of them cancel, ARR falls by €480, even if you have already collected some of this year’s payments. A one-off setup fee stays out of the figure.
Common misunderstanding
People treat ARR as this year’s turnover, or as money sitting in the bank. One-off fees are excluded, and the figure assumes the subscriptions continue. Recurring revenue is the underlying idea. ARR is the yearly measure of it.
When to use it
Use annual recurring revenue once you have subscriptions or recurring contracts and need one number for the size of that repeating income. Before then, report ordinary revenue instead, because annualising one-off project income overstates what will come back next year. If you sell both, report ARR and one-off revenue separately, so a big project month does not look like lasting growth.