ARR is a key metric for your company. It is a measure of your growth and directly predicts your top-line revenue. To that end, it is an important factor to track. An ARR Schedule can be used to easily calculate, forecast and communicate ARR and growth metrics within your company and to potential investors.
There is not one standardized definition for ARR. GST recommends, however, that you only use committed, fixed recurring fees to calculate ARR and exclude one-time fees like implementation or consulting fees. We recommend that you create an ARR Schedule and a process for its regular update. Below is a general outline that will get you started on creating your own schedule. This is a brief explanation on your first steps, but it is an excellent way to get into the mindset of setting up a ARR Schedule.
General Outline for Your ARR Schedule
Customer Contract Information:
Enter customer contract information into the ARR Schedule template provided. You will need to enter the Customer Name, Contract Iteration, Beginning Date, Term, and ACV. The remaining information will populate automatically.
Company Name: It’s tempting to include contracts that are in the process of being signed in ARR calculations. GST strongly recommends you not do this. Only include contracts that are officially won and signed. This maintains sales team motivation to move contracts through that last stage and also prevents your ARR numbers from becoming inflated. Since they are a good estimator to use to forecast your cash position, it is key to keep this number as close to accurate as possible.
Iteration: To maintain the accuracy of historic month MRR, any changes to a company’s MRR (either because of account expansion, reduction, etc) need to be entered on a new line with the effective date representing the first date of the altered contract. Additionally, renewed contracts should be considered new contracts and also entered on a new line.
Months: Additional months can be easily added to the schedule as needed by copying the formulas out.
With the initial ARR Schedule created and updated, generate a process to ensure it is kept up to date and used appropriately. Some considerations before start your outline.
Deliverables: GST recommends that the monthly value for ARR and growth rate calculated in the ARR Schedule be included on your management team’s KPI Dashboard. This is an important number to keep close tabs on. Generally, when the time comes for exit, you will be valued on some multiple of your ARR.
Optional: many companies like to track cohorts of contracts (i.e. cohort based on contract sign month, product update, process update, pricing, etc.) to get insight into the effect of changes on the adoption, expansion and churn habits of customers. The ARR Schedule is a good place to track those cohorts.
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