Accounting Annual Recurring Revenue Formula
Learn how ending ARR, net new ARR, ARR growth, gross revenue retention, and net revenue retention are calculated.
An ARR bridge begins with recurring revenue at the start of a reporting period and records the gains and losses that occurred during that period. Separating new business, expansion, contraction, and churn makes the change in annual recurring revenue easier to interpret.
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Ending ARR
Where:
Start with opening ARR, add recurring revenue from new and expanding customers, then subtract recurring revenue lost through downgrades and customer churn.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| beginningARR - Beginning ARR | Annualized recurring revenue at the beginning of the reporting period. | currency |
| newARR - New customer ARR | Annualized recurring revenue from customers acquired during the period. | currency |
| expansionARR - Expansion ARR | Additional annualized recurring revenue from existing customers. | currency |
| contractionARR - Contraction ARR | Annualized recurring revenue lost when existing customers reduce their commitment. | currency |
| churnedARR - Churned ARR | Annualized recurring revenue lost when customers cancel or do not renew. | currency |
| netNewARR - Net new ARR | The overall change in ARR during the reporting period. | currency |
Step-by-Step Calculation
Record beginning ARR
Use the recurring revenue balance at the start of the chosen reporting period.
beginningARR
Calculate net new ARR
Combine all recurring revenue additions and subtract all recurring revenue losses.
newARR + expansionARR - contractionARR - churnedARR
Calculate ending ARR
Add the period's net ARR movement to beginning ARR.
beginningARR + netNewARR
Calculate ARR growth rate
Express the change in ARR as a percentage of opening ARR.
(netNewARR / beginningARR) * 100
Calculate gross revenue retention
Measure retained opening ARR after losses, without including expansion ARR.
((beginningARR - contractionARR - churnedARR) / beginningARR) * 100
Calculate net revenue retention
Measure retained opening ARR after expansion, contraction, and churn; new customer ARR is excluded.
((beginningARR + expansionARR - contractionARR - churnedARR) / beginningARR) * 100
Worked example: ARR movements over one year
Add ARR gains
$250,000 + $100,000
$350,000
Add ARR losses
$40,000 + $60,000
$100,000
Calculate net new ARR
$350,000 - $100,000
$250,000
Calculate ending ARR
$1,000,000 + $250,000
$1,250,000
Calculate ARR growth
($250,000 / $1,000,000) × 100
25.0%
Calculate retention
NRR = (($1,000,000 + $100,000 - $40,000 - $60,000) / $1,000,000) × 100
100.0%
Final Result
Ending ARR is $1,250,000, net new ARR is $250,000, ARR growth is 25.0%, gross revenue retention is 90.0%, and net revenue retention is 100.0%.
Assumptions
- ✓All inputs are annualized recurring revenue amounts for the same reporting period and currency.
- ✓New customer ARR is tracked separately from expansion generated by existing customers.
- ✓Contraction ARR and churned ARR are entered as positive amounts before being deducted.
- ✓One-time fees, professional services, taxes, and non-recurring usage are excluded.
- ✓ARR classifications are applied consistently across the reporting period.
Limitations
- !ARR is a management metric and may not equal recognized revenue, billings, cash collected, or bookings.
- !The calculator does not allocate ARR by customer cohort, product, geography, or contract term.
- !Foreign-exchange movements and changes in ARR measurement policy are not separately modeled.
- !A period-end ARR figure does not show when gains and losses occurred within the period.
Common Mistakes to Avoid
Including one-time implementation or consulting fees in ARR.
Counting expansion from an existing customer as new customer ARR.
Entering contraction or churn as negative values when the calculator already subtracts them.
Including new customer ARR in gross revenue retention or net revenue retention.
Comparing periods that use different currencies, ARR definitions, or customer classifications.
Related Formulas
Frequently Asked Questions
What is the formula for ending ARR?
Ending ARR equals beginning ARR plus new customer ARR and expansion ARR, minus contraction ARR and churned ARR.
How is net new ARR calculated?
Net new ARR equals new customer ARR plus expansion ARR, less contraction ARR and churned ARR.
How is ARR growth rate calculated?
Divide net new ARR by beginning ARR and multiply by 100.
What is the gross revenue retention formula?
GRR equals beginning ARR minus contraction ARR and churned ARR, divided by beginning ARR, multiplied by 100.
What is the net revenue retention formula?
NRR equals beginning ARR plus expansion ARR, minus contraction ARR and churned ARR, divided by beginning ARR, multiplied by 100.
Why is new customer ARR excluded from NRR?
NRR is designed to isolate how revenue from the opening customer base changed during the period.
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