Annual recurring revenue (ARR)

ARR is the annualised run rate of every recurring subscription you have active right now. It is a snapshot, not a period total: it answers “if nothing changed for the next twelve months, how much recurring revenue would we book?” rather than “how much did we invoice last year.”

The exclusions matter more than the formula. Professional services, implementation fees, one-off training, hardware and pass-through costs are not recurring, so they do not belong in ARR. Neither does usage overage that is genuinely unpredictable — though a committed usage minimum generally does, because the customer is contractually obliged to pay it.

Where ARR calculations go wrong

Three problems account for most disputed ARR numbers in B2B SaaS:

• Ramp deals. A three-year contract at $60k, $90k and $120k has no single ARR. The convention is to report the current contract year’s value, but the number changes at each ramp step, and a spreadsheet built in January will be wrong by June.
• Mid-term changes. Upgrades, downgrades, seat additions and mid-term plan changes all move ARR on the day they take effect, not at the next renewal.
• Multi-currency. ARR reported in your functional currency moves when exchange rates move, even though nothing about the contract changed. Most companies fix the rate at the start of the period and report FX impact separately.

If quotes live in the CRM and subscriptions live somewhere else, every one of those adjustments becomes a manual reconciliation. When quoting and subscriptions share a system of record, ARR is derived from the contract data rather than reassembled each month.