How is Annual Recurring Revenue (ARR) calculated?

Summary

ARR is a non-GAAP metric that companies use to track their growth over time. Because the metric is not defined by GAAP, each company can choose the items they include/exclude in the metric and how to prorate sales across periods.

Tabs provides a single approach that is suitable for most B2B SaaS companies. Merchants can choose which categories to include in the metric to align with their internal policies.

Instructions

• From Customers > Products, assign Categories to each item you sell

• From the Revenue > ARR Waterfall, decide which Categories you want to include in ARR

• Use the waterfall to see your New logos, Expansion, Contraction, and Churn across time

Calculation

• When computing ARR, Tabs takes the product's total contract value, divides it by the number of months of the contract, and then multiplies by 12. For instance, if a contract is 1200 upfront, from Jan 11 to July 10, Tabs will:

  • Take the total contract value divided by the number of month: $1200/6 = $200.

  • Multiply by the number of months in a year (12):
    200 * 12 = $2400 ARR.

Best Practices

• Revenue that is not reliably recurring is generally excluded from ARR. That includes one-off professional services, overages, and usage-based items without minimums.