Annual Recurring Revenue: What Is ARR & How To Calculate It (Calculator Included)

ARR (Annual Recurring Revenue) is the amount of predictable revenue a company expects to generate each year from its subscription-based products or services.

It’s a standardized way to measure the annual value of recurring contracts, giving businesses a clear picture of their long-term revenue stream.

This is an important financial metric and is most commonly used by SaaS companies and other subscription businesses that bill customers on a regular basis — whether monthly, quarterly, or annually. Unlike one-time sales, ARR focuses solely on revenue that renews automatically or is contractually guaranteed to recur each year.

Why ARR Is So Important (Especially for the CFO)

ARR is one of the most valuable metrics for any subscription-based business, and it’s especially critical to the Office of the CFO.

At a high level, ARR gives companies a clear view of their financial health. It helps you:

• Forecast revenue more accurately, using predictable income instead of one-off sales
• Track gowth by breaking ARR into new, expansion, and churned revenue
• Set targets and align teams around revenue goals that are grounded in recurring value
• Communicate Performance with a consistent metric for executive dashboards and board reports

But for CFOs specifically, ARR goes even deeper:

• It informs cash flow planning by acting as a baseline for expected income
• It plays a central role in valuation discussions during fundraising or acquisition
• It helps guide budgeting and resource allocation, ensuring spend is aligned with steady revenue
• It supports risk analysis by showing how much of your revenue is locked in versus exposed to churn

In short, ARR is more than a metric. ARR is a strategic tool for driving sustainable growth, making smart investment decisions, and giving finance leaders the confidence to lead from the front.

How To Calculate ARR (Plus ARR Calculator)

If you know your MRR, multiply it by 12 to your get your ARR.

If you don't know your MRR then take the revenue generated by the contract value and divide it by the length of the contract.

For example:

If a customer signs a three-year contract for $150,000, then the ARR would be $50,000.

Some companies will look at ARR at a more granular level by breaking it out into categories such as:

• ARR from new customers
• ARR from existing customers
• ARR from add-ons purchased on top of the base offering
• ARR lost due to churn

You can use our ARR calculator below to calculator ARR.

ARR Calculator

What To Exclude in an ARR Calculation

You can exclude the following in your ARR calculation:

• One-time fees (such as implementation fees)
• One-time purchases (such as non-recurring add-ons)
• Any other revenue that won’t be earned at an ongoing basis

Five Ways to Optimize ARR

Growing ARR isn’t just about acquiring more customers — it’s about increasing the long-term value of each account while reducing revenue leakage. Here are five proven ways to optimize ARR:

1. Upsell and Cross-Sell Strategically

Encourage existing customers to upgrade their plans or add complementary services. Tailored recommendations, usage-based triggers, and success-driven onboarding can help drive higher contract values.

2. Reduce Churn with Better Retention Tactics

Customer success teams play a critical role here. Regular check-ins, proactive support, and clear value delivery reduce the risk of cancellations — and protect your ARR from slipping.

3. Improve Onboarding and Time to Value

The faster a customer sees value, the more likely they are to stick around. A smooth onboarding process helps reduce early-stage churn and sets the foundation for renewals and expansions.

4. Refine Pricing and Packaging

Optimizing how you price and package your product can unlock more revenue. Consider tiered pricing, usage-based billing, or bundling features to better match customer needs and willingness to pay.

5. Introduce Annual Commitments

Monthly plans offer flexibility, but annual contracts provide stability. Incentivize longer-term commitments with discounts or bonus features to lock in recurring revenue for the year ahead.

What Is the difference between ARR and MRR

ARR stands for annual recurring revenue while MRR refers to monthly recurring revenue.

Many companies give customers the option of purchasing their subscription on a yearly or monthly basis, such as Amazon Prime.

Mistakes To Avoid When Calculating ARR

Although calculating your ARR may seem simple, there are several mistakes that companies often make when doing so. Here are a few of the most common mistakes that you should avoid when calculating annual recurring revenue:

• Counting ARR as cash. Remember that with a subscription-based model, you don’t receive all of the money in the agreement upfront—it will be paid out yearly for the duration of the agreement. For example, if a customer signs a two-year agreement for $50,000 you will receive $25,000 in the first year and $25,000 in the second.
• Using it as a historical metric instead of as a forward-looking metric. ARR looks at how much money you will receive in the future, not the past.
• Forgetting to include discounts or late payments in calculations. If you offer a discount on the subscription, be sure to take that into consideration instead of mistakenly using the base price in your calculations. And although late payments from your customers are not ideal, they still count as ARR.

ARR vs Gross Profit: Don’t Confuse the Two

While ARR tells you how much revenue you expect to bring in from subscriptions, gross profit tells you how much of that revenue you actually keep after delivering your product or service.

ARR is more than just a buzzword

It’s a foundational metric for subscription-based businesses and an essential tool for the Office of the CFO. Whether you're planning revenue forecasts, reporting to the board, or refining pricing strategies, ARR gives you the clarity and consistency needed to make smart, long-term decisions.

But ARR doesn’t tell the full story on its own. To get a complete picture of your company’s financial health, it should be viewed alongside metrics like gross profit, cash flow, and MRR.

That’s where tools like Vena come in — helping finance teams bring all their data together, model future scenarios, and stay in control of what’s ahead.

When you understand ARR and how to optimize it you’re not just measuring growth.

You’re managing it.