Annual Recurring Revenue (ARR) is a critical metric for subscription-based and SaaS businesses. It represents the predictable revenue you can expect to receive from existing contracts over one year. L...
Last updated Feb 18, 2026 · 3 min read
Annual Recurring Revenue is calculated by taking the monthly recurring revenue (MRR) and multiplying by 12. It's particularly important for companies with:
Unlike one-time revenue, ARR provides visibility into predictable, recurring cash flows. It's a key metric for business valuation, cash forecasting, and investor relations.
ARR = Monthly Recurring Revenue × 12
Light automatically calculates MRR from your subscription contracts:
For example, if you have:
Your MRR = EUR 1,416.67, therefore ARR = EUR 17,000.
ARR changes as contracts are added, renewed, or churned. Light tracks these movements:
New ARR is revenue from new contracts signed in the current period that had no prior contract value.
Expansion ARR is the incremental revenue from existing customers through upsells or additional purchases.
Churn ARR is revenue lost from contracts that ended or were significantly reduced.
Renewal ARR is revenue from contracts that were renewed.
Your net ARR growth = New ARR + Expansion ARR - Churn ARR + Renewal ARR
Good to know: Tracking these components separately provides insights into whether growth comes from new customers, existing customer expansion, or churn reduction.
ARR tracking is enabled automatically for AR (accounts receivable) invoices with recurring revenue characteristics:
For enhanced tracking, associate invoices with subscription contracts:
Light provides multiple views of ARR data:
ARR Summary Dashboard shows:
ARR Cohort Analysis tracks cohorts of customers acquired in the same period:
ARR Forecast projects future ARR based on:
For multinational companies, ARR can be reported in transaction currency, local currency, or group currency:
When reporting ARR in multiple currencies, use consistent rate sources (typically month-end rates) to avoid calculation inconsistencies.
Tip: Report ARR in your group currency for board/investor presentations and in local currency for subsidiary-level operational reporting.
When customers upgrade, downgrade, or churn mid-period, Light adjusts ARR calculations:
Upgrades (expansion): Create a new AR invoice for the incremental amount and mark it as expansion revenue.
Downgrades: Create a credit note (CN) to reduce contracted amount and mark churn.
Churn: End-date the contract in the subscription tracking system.
Light automatically recalculates ARR in real-time as these changes are recorded.
It's important to note that ARR differs from recognized revenue under IFRS 15:
For example, if a customer pays EUR 12,000 upfront for a 12-month SaaS contract:
Light reports both metrics separately: ARR for business management and deferred revenue for financial reporting compliance.
ARR data feeds into Light's budget and scenario planning features:
See Budget Scenarios for detailed forecasting capabilities.
Define recurring clearly: Establish which contracts qualify as "recurring" (typically 12+ month terms with auto-renewal).
Clean data discipline: Ensure all subscription contracts have accurate start/end dates and billing frequency.
Cohort tracking: Segment ARR by acquisition channel, customer segment, or geography to identify high-value customer sources.
Churn monitoring: Track churn rate monthly and investigate spikes in ARR reduction.
Reconciliation: Monthly, reconcile reported ARR to AR aging report and contract management system.
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