Annual run rate (ARR)
Annual Run Rate (ARR), or commonly referred to as Run rate is a metric that measures the amount of money brought in by a company on an annual basis, which is calculated by multiplying the monthly recurring revenue (MRR) by 12. It’s one of the most important metrics to track, as it helps forecast revenue for the year ahead.
It's a way of measuring a company's performance and is often used as a predictor of future growth.
How is Annual run rate (ARR) calculated?
Annual run rate is calculated by taking a company's current revenue and multiplying it by 12.
The formula for calculating Annual run rate (ARR) is:
ARR = MRR x 12
There are a few things to keep in mind when calculating run rate. First, it's important to use consistent time periods. For example, if you're using quarterly data, make sure to use the same quarter each year. Second, run rate doesn't take into account one-time events that can impact a company's revenue, such as a major product launch.
If a company's monthly recurring revenue is $10,000, their annual recurring revenue would be $120,000 ($10,000 x 12).
Why is Annual run rate (ARR) important to measure?
ARR is important to investors because it represents a company's ability to generate profit every year. It shows how much money they can expect to earn from their customers every year after factoring in their expenses and operating costs. This is important because it allows investors to make informed decisions about whether or not they want to invest in a particular business venture based on its financial viability and sustainability over time.
Frequently asked questions
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- How do I calculate my ARR growth rate?
To calculate your ARR growth rate, take the difference between your current ARR and the previous ARR, and then divide it by your previous ARR. For example, if the last time you did this calculation, it was $1,000 and this time it's $1,200:
($1,200 - $1,000) / $1,000 = 20%
This gives you an ARR growth rate of 20%.
- What is the difference between ARR and MRR?
ARR stands for “Annual Run Rate” and is a measure of how much recurring revenue a business makes from its customer base in a year. MRR stands for "Monthly Recurring Revenue," and is a metric that measures how much money the company makes from its existing customers each month.
- What is the difference between ARR and revenue?
ARR is the total recurring revenue generated by a business across one year. Revenue is money generated by a business, this can be across various periods of time.
- What is considered recurring revenue?
Recurring revenue is revenue that is generated from an ongoing subscription contract. This can be on a monthly basis or on an annual basis.
- What are examples of recurring revenue?
There are many types of recurring revenue businesses.
- Subscription Boxes (Birchbox).
- Subscribe and Save products (Dollar Shave Club).
- Software as a service (SaaS) companies (Intercom).
- Digital Subscriptions (Spotify).
- What if my company had a one-time event that impacted revenue?
One-time events, such as a major product launch, can impact a company's run rate. In these cases, it's best to exclude the event from your calculation.
- Do I need to adjust for inflation when calculating run rate?
No, run rate is typically calculated using current revenue numbers.
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