Annual recurring revenue (ARR) is the total recurring subscription revenue a company generates over a 12-month period. The simplest way to work it out is to multiply your monthly recurring revenue (MRR) by 12.
CFI says ARR is different from total annual revenue because it only includes predictable, recurring subscription revenue. One-off sales don't belong in it. That's what makes it useful: CFI says it's used to measure year-over-year progress and to compare a company's performance against its own history.
The ARR formula, basic and full
| Metric | Formula | CFI's example (as of October 2026) |
|---|---|---|
| MRR | Normalised monthly recurring revenue: sum it per customer, or ARPU x customers | The building block for ARR |
| ARR (basic) | MRR x 12 | 50 customers x $100 a month x 12 = $60,000 |
| ARR (full) | Annual subscription revenue + expansion ARR - contraction ARR - churned ARR | $400,000 at the start of the year to $500,000 at the end, 25% growth |
Basic ARR. In CFI's example, a SaaS company sells subscriptions to 50 customers who each pay $100 a month. MRR is 50 x $100, and ARR is that figure multiplied by 12, which gives $60,000.
Full ARR. CFI's comprehensive version is the sum of annual subscription revenue, plus expansion revenue, minus contraction ARR, minus churned ARR. Expansion ARR is the extra revenue from upgrades, upsells or increased usage. Contraction ARR is revenue you lose to downgrades or seat reductions. Churned ARR is revenue lost when customers leave.
A worked ARR example
Here's CFI's illustrative subscription software company, step by step:
- Start of year ARR: $400,000.
- New ARR: 20 new customers on $5,000 annual contracts adds $100,000.
- Expansion ARR: upgrades and upsells add $50,000.
- Contraction ARR: downgrades take away $20,000.
- Churned ARR: customers who left take away $30,000.
- Ending ARR: $400,000 + $100,000 + $50,000 - $20,000 - $30,000 = $500,000, a year-over-year growth rate of 25%.
Notice how much the leaks matter. Churn and contraction together took away half of what expansion added. If churn is the bigger leak in your own numbers, this guide to churn rate shows how to measure it.
ARR vs MRR
CFI describes MRR as the revenue a company expects to receive each month from customers. It measures normalised monthly revenue and is commonly used by SaaS companies on subscription models. You can calculate it per customer and add the results up, or multiply monthly ARPU (average revenue per user) by the number of customers.
CFI also says MRR can be split into components, including churned MRR from cancellations, and those components let you calculate Net New MRR. That shows which sources pushed MRR up or down compared with the previous period. In practice, MRR is the month-by-month view you manage, and ARR is the annual view you report.
One thing worth knowing: CFI says MRR isn't recognised by accounting standards such as GAAP or IFRS, yet investors still monitor it, and most public SaaS companies report it. It's used for forecasting and for judging growth trends, alongside your formal accounts, not instead of them.
The catch: there's no single ARR formula
Two companies can both quote ARR and mean different things. CFI says there's no universal ARR formula, and lists where the differences creep in:
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- Billing terms differ: monthly, annual or multi-year.
- One-time fees: many companies leave out fees such as implementation, while others include steady annual maintenance or add-ons.
- Timing: some update ARR straight away for upgrades, downgrades and churn, while others only track current active contracts.
- Audience: internal reporting is often conservative, while investor reporting may include signed deals that haven't started billing yet.
So when you compare your ARR with anyone else's, ask what's in it first.
How to calculate ARR in four steps
- List recurring subscription revenue only. Leave out one-off sales.
- Take MRR and multiply it by 12 for basic ARR.
- Add expansion, then subtract contraction and churn for the full version.
- Write down what you include and exclude, and keep it the same every period.
ARR tells you the size of the business, but not how healthy each group of customers is. For that, a cohort retention analysis shows which sign-up months stick around.
Where I come in
I work with SaaS marketing teams on the side of ARR that marketing can move: which channels bring in customers who stay and expand, and which bring in customers who churn in the first few months. You can see how I work on my work with me page.
The verdict on ARR
Pick one definition, write it in your dashboard notes and never change it quietly. A board or an investor will trust a steady definition more than a bigger number, and CFI's list shows how easily ARR grows when you quietly change what goes in. Report the basic and full versions side by side, and watch churn and contraction as closely as you watch new sales.
Frequently asked questions
How do you calculate annual recurring revenue?
The basic method is MRR multiplied by 12. CFI's fuller version is annual subscription revenue plus expansion revenue, minus contraction ARR, minus churned ARR.
What is the difference between ARR and MRR?
MRR is normalised monthly recurring revenue, the revenue a company expects each month from subscriptions. ARR is the same recurring revenue measured over 12 months.
Does ARR include one-time fees?
CFI says there's no universal rule. Many companies exclude one-time fees such as implementation, while others include consistent annual maintenance or add-ons.
Is MRR recognised by GAAP or IFRS?
No. CFI says MRR isn't recognised by accounting standards such as GAAP or IFRS, but investors still monitor it and most public SaaS companies report it.
