ARR vs MRR: How to Calculate and Reconcile Both

What is the difference between ARR and MRR?

MRR is the recurring subscription revenue you have under contract for one month, and ARR is the same revenue expressed over a year, so the two differ in scale rather than in substance and an ARR is never better than the MRR underneath it.

The difference that matters in practice is who reads each one. MRR is the operating metric: you manage pricing, churn and expansion on it month to month, because a monthly number moves fast enough to show the effect of a decision. ARR is the comparison metric: boards and investors use it to size the business, set a valuation multiple and compare you with companies on annual contracts.

Neither is revenue in the accounting sense. Both measure recurring contracts at a point in time. Your profit and loss recognises revenue as the service is delivered, which is why a company that grew through the year recognises less subscription revenue over that year than its closing ARR. That difference is expected. A difference between your ARR and your billing system is not, and it is the subject of most of this page.

How to calculate MRR

MRR is the sum, for the last closed month, of the monthly value of every active subscription contract: monthly plans at their monthly price, annual and multi-year contracts at their annual value divided by 12, net of contracted discounts.

The definition used throughout this page, stated once:

MRR = the monthly value of all live, contracted, recurring subscription charges at the end of the last closed month.

ARR = MRR × 12.

Measure it on the last closed month, not on today. A mid-month figure mixes customers who have started with customers who have been invoiced, and it cannot be checked against anything.

A customer who has given notice stays in MRR until the contract ends, is flagged under the bridge as notified churn, and leaves ARR as churned ARR in the month the contract ends. Whatever conventions you choose, write them down and apply them the same way every month.

How to calculate ARR, and why MRR times 12 can still be wrong

ARR is always 12 times MRR by definition, so the formula is never what goes wrong. What goes wrong is the MRR: three situations inflate it, and ARR inherits the error.

Annual and multi-year contracts counted at full value. A $120,000 annual contract is $10,000 of MRR and $120,000 of ARR. Counting the whole $120,000 in the month it is invoiced makes that contract’s share of MRR twelve times too large, and multiplying that month by 12 carries the same error into ARR. For a multi-year contract with price steps, use the annual rate in force at the measurement date, not the total contract value divided by the number of years: averaging over the term counts next year’s price increase in this year’s ARR. That is our convention; whichever you use, say so.

Signed contracts not yet started. A contract signed in August that starts billing in October adds nothing to August MRR. It belongs in CARR, not ARR.

Usage revenue from one strong month. If August overage was unusually high, August MRR measured on total billing is unusually high, and ARR built on it assumes August repeats twelve times.

What does not count as ARR: CARR, usage run-rate, pilots and one-time fees

Any revenue without a renewable contractual commitment belongs next to ARR, never inside it: CARR for contracts signed but not yet billing, a usage run-rate for consumption annualised from recent months, and nowhere at all for free pilots and one-time fees.

The rule is not new. The a16z 16 Startup Metrics, published in 2015 by Jeff Jordan, Anu Hariharan, Frank Chen and Preethi Kasireddy, said ARR “should exclude one-time (non-recurring) fees and professional service fees.” It named the usual mistake too: “Often, people will multiply one month’s all-in bookings by 12 to get to ARR.”

What is new is how many companies now price outside a simple subscription. In Kyle Poyar’s 2026 State of B2B SaaS and AI Monetization, published by Growth Unhinged on 13 May 2026 from a survey of more than 230 software companies, 37 percent of respondents reported a hybrid pricing model, against 25 percent who said they had been hybrid twelve months earlier. Many of those models layer usage or credits on top of a subscription, and for those companies deciding what counts as ARR is a monthly decision rather than an edge case.

For AI companies the question has become public. Mikael Johnsson of Oxx, quoted by PitchBook in an article first published in December 2025, put it this way: “For the majority of AI-native companies, ARR isn’t really ARR as we know it, but rather a hotchpotch of one-off, credits-based, performance-based or outcome-based revenue contracts.” In May 2026, TechCrunch described, among other practices, contracted ARR presented as ARR, a free year-long pilot counted as ARR, and run rates extrapolated from a single month, week or even day.

One more term causes confusion. Run rate, used on its own, usually means last month’s total revenue multiplied by 12, services and one-time fees included. It is a measure of revenue scale, and it is not ARR either.

The fix is presentation, not concealment. The four lines below are all legitimate metrics. Only the first one is ARR.

How far is reported ARR from reconcilable ARR?

Across 24 Offset Partners engagements with SaaS and AI companies between September 2025 and August 2026, the ARR reported to the board was higher than reconcilable ARR, meaning the ARR their billing system supported, in all 24 cases, by 2 to 22 percent, with a median of 8.5 percent.

Reconcilable ARR is the contracted MRR of the last closed month, rebuilt from the company’s billing system, multiplied by 12. The gap is the ARR reported to the board minus reconcilable ARR, divided by reconcilable ARR. A company reporting $3.3M against $3.0M of reconcilable ARR has a 10 percent gap.

At the median of these engagements, a company reporting $5M of ARR could support about $4.6M.

In our experience, none of this requires dishonesty. The figure in a board deck is usually built in a spreadsheet, from a dashboard, by someone who never had to tie it to anything, and every convention left unwritten resolves in the direction that makes the number larger. Rebuilding MRR from the billing system and tying it to the ledger every month is close work, which is why it sits in our controller services rather than in a forecast.

How to reconcile ARR to your billing system and general ledger

Reconciling ARR takes four steps: rebuild contracted MRR for the last closed month from the billing system, multiply by 12, bridge every difference between that figure and the ARR you reported, then check the rebuilt MRR against the subscription revenue recognised in your general ledger for the same month.

1. Rebuild MRR from the billing system. Export every active subscription at the end of the last closed month. Convert annual and multi-year contracts to their monthly value, deduct contracted discounts, and remove one-time lines, services and usage above commitments. If your MRR comes from the Stripe dashboard or a subscription analytics tool, treat it as a starting point: check how it handles annual prepayments, discounts, usage and one-off invoice items against the table above. And take the export at month end, or rebuild month-end status from each subscription’s start and cancellation dates, because an export pulled today shows today’s customers.
2. Multiply by 12. That is your reconcilable ARR.
3. Bridge the reported figure. List every item between reconcilable ARR and the ARR you reported, and classify each one: CARR, usage run-rate, one-time, churned customer still counted, or error.
4. Tie to the ledger. Compare the subscription revenue recognised in your general ledger for the same month with the rebuilt MRR. The two match once every difference has a name: a customer who started mid-month, a credit, a one-time fee posted to the subscription revenue account, an annual contract recognised in full in the month it was invoiced. A difference you cannot name is the finding.

An illustrative example. A company’s August board deck shows $3,300,000 of ARR. Its billing system, rebuilt at 31 August, shows $250,000 of contracted MRR, so reconcilable ARR is $3,000,000. The gap is $300,000, or 10 percent, slightly above the median gap in our engagements.

The bridge finds three items. A $96,000 annual contract signed in August that starts billing on 1 October: that is CARR. August usage overage of $12,000, multiplied by 12 into $144,000: that is usage annualised from one strong month, and it belongs outside ARR. And $5,000 of August implementation fees, multiplied by 12 into $60,000: that is one-time revenue and belongs in no recurring line at all. $96,000 plus $144,000 plus $60,000 is $300,000, so every dollar of the gap has a name.

The ledger check. August subscription revenue in the general ledger is $253,000 against $250,000 of rebuilt MRR. Two items explain the $3,000: the same $5,000 of implementation fees, posted to the subscription revenue account, and a customer on $4,000 per month who went live in the middle of August, fully counted in contracted MRR at month end but recognised for $2,000 in August. $250,000 plus $5,000 minus $2,000 is $253,000. The $12,000 of overage sits in a separate usage revenue account and does not enter the comparison.

Correctly presented, the same company reports $3,000,000 of ARR, $3,096,000 of CARR, and a usage run-rate on its own line built on the last three months rather than August alone: June $8,000, July $10,000 and August $12,000 of overage, $30,000 times 4, or $120,000. The business did not change. The number now survives anyone who rebuilds it.

The check that tells you whether you have the problem. Can you rebuild last month’s contracted MRR from your billing system, multiply it by 12, and land on the ARR in your last board deck with every difference named? If you cannot, the ARR you are reporting is an estimate, and the person who will find out by how much is the next investor who asks for the subscription export.

ARR or MRR: which one to report to your board and investors

Report ARR to your board and investors, with its written definition and a monthly ARR bridge, keep MRR as the internal operating metric, and show CARR and a usage run-rate on their own lines when they are material. That is our recommendation rather than a reporting standard, and it is what diligence will rebuild anyway.

An ARR bridge walks from last month’s closing ARR to this month’s through four movements:

Closing ARR = opening ARR + new ARR + expansion ARR minus contraction ARR minus churned ARR.

For a company closing August at $3,000,000 of ARR: opening ARR at 31 July of $2,910,000, plus $72,000 of new and $36,000 of expansion, minus $6,000 of contraction and $12,000 of churn, gives closing ARR at 31 August of $3,000,000. A board that sees this bridge every month sees where growth came from, and a board that sees only the closing figure cannot tell growth from a change of convention. The same bridge gives you net new ARR, the denominator of your burn multiple.

The same movements give the two retention ratios boards ask for next. Over a period, net revenue retention is opening ARR plus expansion minus contraction and churn, divided by opening ARR, counting only customers present at the start. Gross revenue retention is the same calculation without expansion.

Write the definition down in one page: what counts, the measurement date, how multi-year contracts, usage minimums and churned customers are treated. Then change it only with a restated history. Defining the metrics a board sees and keeping them stable from one meeting to the next is fractional CFO work; making them tie to the ledger every month is the controller layer underneath it.

What a gap between reported and reconcilable ARR costs you in diligence

In diligence, an investor rebuilds ARR from contracts and the billing export, so a gap you found and restated yourself becomes a line in your bridge, while a gap the investor finds becomes a question about every other number in the data room. That is our judgment from client work rather than a measured result.

The cost is rarely the difference itself. A $300,000 restatement, 10 percent of the $3M the billing system supports, is real money at a growth-stage multiple, but the larger cost is sequence. An investor who finds the gap after the term sheet reprices from a position of doubt, widens the confirmatory work to revenue, margin and cash, and extends the timetable while your runway keeps running.

Restating before you raise costs a board update. Restating during diligence costs negotiating position. The work is identical; only the timing changes who controls the explanation, and rebuilding the figure ahead of a raise is the first thing our controller services do.

How Offset Partners reconciles ARR

We work only with SaaS and AI companies, so rebuilding contracted MRR from Stripe or another billing system, bridging it to the ARR a founder reports and tying it to the ledger is part of every monthly close we run, not a project we discover on your time.

The diagnostic starts by rebuilding your MRR for the last closed month and putting it next to the ARR in your last board deck, because every other metric an investor will ask for is built on that figure. Controller support starts from $2,500 per month and fractional CFO support from $3,500. If your ARR already reconciles to your billing system and your ledger with every difference named, we will tell you that, and there is nothing here for us to sell you.

How subscription revenue, processor fees and deferred amounts should sit in the ledger in the first place is covered in our SaaS chart of accounts template.

Sources

External sources on this page, with the date each was published.

• Definition of ARR excluding one-time and professional service fees, and the warning against multiplying one month of bookings by 12: 16 Startup Metrics, Jeff Jordan, Anu Hariharan, Frank Chen and Preethi Kasireddy, a16z, published 21 August 2015. A definition rather than a statistic.
• 37 percent of respondents with a hybrid pricing model, against 25 percent who said they had been hybrid twelve months earlier: The 2026 State of B2B SaaS and AI Monetization, Kyle Poyar, Growth Unhinged, published 13 May 2026. Population: more than 230 software companies surveyed in April and May 2026, self-reported.
• Quotation from Mikael Johnsson of Oxx: AI’s hottest metric is getting harder to trust, Leah Hodgson, PitchBook, first published 19 December 2025, updated 22 June 2026.
• Practices described as inflating ARR at AI startups: How VCs and founders use inflated ‘ARR’ to crown AI startups, Marina Temkin, TechCrunch, published 22 May 2026.
• The treatment of committed usage minimums, the three-month usage window, churn timing and multi-year price steps, and the reporting recommendation, are Offset Partners’ own guidance, not a requirement of an accounting standard. The worked example is illustrative.

The ARR gap, higher than reconcilable ARR in 24 of 24 engagements, by 2 to 22 percent, median 8.5 percent, is Offset Partners’ own data. Population: 24 engagements with SaaS and AI companies between September 2025 and August 2026. Reconcilable ARR: contracted MRR of the last closed month, rebuilt from the billing system, multiplied by 12. Gap: ARR reported to the board minus reconcilable ARR, divided by reconcilable ARR.

Related resources

• SaaS chart of accounts template
• SaaS gross margin benchmarks
• SaaS finance readiness checklist
• When to hire a fractional CFO
• SaaS runway calculator
• Burn multiple calculator: formula, benchmarks, and your ARR

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• Book a SaaS finance diagnostic