Typically used by subscription-based companies, annual recurring revenue (ARR) is the normalized annual revenue that a company expects to receive from its subscribers in return for the products or services provided. Essentially, it’s a snapshot of your revenue at a given point in time. It can fluctuate with the addition or churn of customers.
To further illustrate, we’ll walk through an ARR scenario. In its most simplistic form, let’s assume you have a single customer. Say they purchased a five-year cloud storage subscription for a total of $15,000. Your ARR will be $3,000 ($15,000 / 5 = $3,000). With the addition or churn of subscribers, varying contract lengths, different products or services purchased and diverse pricing schemes, you can see how our simplistic example can quickly become more complex.
Why Use Annual Recurring Revenue?
For software as a service (SaaS) businesses, annual recurring revenue is what they live and breathe, and for good reason. The recurring revenue sought by subscription-based companies is their bread and butter. Being able to leverage these metrics provides the business with opportunities to set realistic goals and forecast future revenue more precisely. Let’s take a look at the top three advantages annual recurring revenue provides to SaaS companies.
- Measures the company’s growth. Annual recurring revenue is a good measure of a company’s growth or decline. When the company compares annual recurring revenues over consecutive years, they can quickly determine whether their business decisions are having a positive or negative effect. This gives them the opportunity to modify their business plan if needed.
- Forecasts revenue. Sometimes this is referred to as a financial baseline. Annual recurring revenue can easily be used for more complex calculations to project future revenue.
- Assesses the business model. Since annual recurring revenue only takes into consideration subscription revenues, it gives companies the opportunity to make informed decisions on the profitability of their subscription business model.
Forecasted to reach $143.7 billion by 2022, the SaaS market continues to experience exponential growth. To stay ahead in today’s competitive world, you need a clear and concise view of the health of your business. If you’re manually trying to keep your finger on the pulse of your financial standing, chances are the data you’re using isn’t providing accurate information. Without concise financial data, you’ll struggle to make informed decisions. This leaves you at risk of making choices that can negatively impact your business.
How to Simplify The Process
Streamlining annual recurring revenue processes is critical to staying on top of your financial position, and gives you the time to do what you do best. Growing your business! With the right billing solution, you can automate annual recurring revenue processes. This gives you the convenience, predictability and simplicity needed to take your company to the next level.
Regardless of your subscription pricing model – flat-rate, basic tiered, per-user/per-unit, freemium, you can improve billing accuracy and efficiency by converting time and resource-heavy subscription management processes.
Reclaim even more time spent handling subscriptions by giving your subscribers the ability to serve themselves. With self-service options such as viewing usage and past payments, downloading statements, making payments, and managing payment methods, a customer portal empowers them to manage their own accounts. This frees up your finance resources for other critical tasks.
Payments can be made in a variety of methods – debit/credit cards, checks, PayPal and ACH, as well as payment gateways. Give customers the choices they want with a system that automates credit card and ACH payments and provides pre-integrated payment gateways. Then they can make fast and secure payments, ensuring your recurring revenue stream is as efficient as possible.
To maximize recurring revenue and increase first time billing accuracy, you need a billing management solution that delivers easy-to-use point-and-click configuration. The solution should automate even the most complex billing, invoicing and taxation processes.
You also need to maintain compliance with tax regulations regardless of where you operate. With an out-of-the-box tax solution, you can quickly send the required information to the tax engine for efficient and accurate calculations.
Revenue recognition and reporting
Invoicing and receiving payments is just half of the equation. Recognizing revenue must adhere to strict rules like ASC 606 and IFRS 15. Being compliant requires a billing system that automates the entire quote-to-cash process. One that handles all of your revenue recognition requirements without human intervention.
To truly understand the health of your subscription business, you need the ability to turn your data into intelligent insights. Out-of-the-box reports will provide some of the metrics needed. However, a billing system that allows you to create custom reports and dashboards lets you easily manipulate your data. You’ll then gain insights into how well your business is performing, customer churn, profitability, outstanding invoices, what is selling and what isn’t, and much more.
Whether you want to determine how well you’re measuring up to financial goals, planning for new or the retirement of products or services, calculating new subscribers and churn, or establishing an accurate revenue forecast, annual recurring revenue provides the metrics you need to make informed decisions.
Streamline Your Annual Recurring Revenue Processes
Keeping your subscription business profitable requires an accurate view of its health and success. However, manually handling annual recurring revenue processes can take a bite out of your profitability. BillingPlatform’s cloud-based system enables you to easily automate the entire quote-to-cash process, giving you complete financial control. With BillingPlatform you’ll always have a complete view of your financial standing so that you can run your subscription-based business with greater efficiency and accuracy.