So many companies are unable to provide closing-ready reports that pass investor scrutiny on the most basic of SaaS metrics, like annual recurring revenue (ARR). All too often, SaaS companies take a haircut on their expected enterprise value – or worse, the investors walk away – because of the skeletons that are unearthed in their ARR reporting during financial due diligence.
The inability to consistently and accurately track movements in ARR isn’t just a problem when it comes time for funding; it’s an ongoing issue that inhibits business leaders’ ability to monitor and take action on emerging trends in the business. But how can this be so difficult? ARR is just monthly recurring revenue (MRR) x 12, right?
Well, yes, but it’s important to remember that MRR and ARR are non-GAAP measurements. Their purpose is to measure the normalized, ongoing value of customer relationships that can be reliably used by SaaS businesses to predict future revenues and monitor growth trends. Unfortunately, many companies make the mistake of utilizing monthly GAAP recognized revenue as the basis for MRR and then extrapolating that value to report ARR.
With GAAP revenue principles applied in accordance with ASC 606, this approach can lead to significant distortions and misstatements in ARR that confuse business leaders, create headaches in monitoring SaaS metrics for finance teams and may cost you millions with investors. The following are just a handful of examples of where GAAP revenue-based ARR analyses fail, and how a contract based ARR approach leads to superior results.
If you want to avoid these pitfalls and automatically deliver the holy grail of recurring revenue– committed annual recurring revenue (CARR) – make sure to read to the very end.
