How to Build and Maintain an ARR Schedule

ARR is the key metric for your company. It is a measure of your growth and directly tracks your creation of enterprise value. To this end, it is a tremendously important factor to track.

There is not one standardized definition for ARR. Golden Section recommends, however, that you only use committed, fixed recurring fees to calculate ARR and exclude one-time fees like implementation or consulting.

Thoughtfully tracking your ARR in a schedule and keeping it current will result in better confidence in your business processes when the time to exit arrives. This is because a primary area of diligence when selling a company is revenue. A messy ARR schedule causes concern about the revenue number itself which can result in a lower exit price. As a seller, you don't want to be arguing what is and what is not revenue. You want to

have a consistent approach over several years expressed in the same format for tracking revenue.

Another area the ARR schedule helps is in defining what makes up revenue. Most enterprise software firms will have a range of customer contracts for different situations. In addition, contracts change, but you might not have updated earlier customers onto the new contract. This complexity causes concern from buyers. Clearly illustrating ARR next to a customer with information on the type of contract that customer is on will alleviate this concern.

The impact: An ARR Schedule can be used to easily calculate, forecast and communicate ARR and growth metrics within your company and to potential investors.

The goal: Create an ARR Schedule and a process for its regular update.

How can Golden Section Assist?

Steps

1. Enter customer contract information into the ARR Schedule template provided. You will need to enter the Customer Name, Contract Iteration, Beginning Date, Term, and ACV. The remaining information will populate automatically.
   • Company Name: It's tempting to include contracts that are in the process of being signed in ARR calculations. Golden Section strongly recommends you not do this. Only include contracts that are officially won and signed. This maintains sales team motivation to move contracts through that last stage and also prevents your ARR numbers from becoming inflated. Since they are a good estimator to use in forecasting your cash position, it is key to keep this number as close to accurate as possible.
   • Iteration: To maintain the accuracy of historic month MRR, any changes to a company's MRR (either because of account expansion, reduction, etc.) need to be entered on a new line with the effective date representing the first date of the altered contract. Additionally, renewed contracts should be considered new contracts and also entered on a new line.
   • Contract Number: This is the number from the contract register that outlines the contract which that ARR comes from (see Contract Register Play).
   • Months: Additional months can be easily added to the schedule as needed by copying the formulas out.
2. With the initial ARR Schedule created and updated, generate a process to ensure it is kept up to date and used appropriately. Use the PDCA (Plan, Do, Check, Act) process template to document this process. Considerations:
   • Deliverables: Golden Section recommends that the monthly value for ARR and growth rate calculated in the ARR Schedule be included on your management team's KPI Dashboard. This is an important number to keep close tabs on. Generally, when the time comes for exit, you will be valued on some multiple of your ARR.
3. Optional: many companies like to track cohorts of contracts (i.e. cohort based on contract sign month, product update, process update, pricing, etc.) to get insight into the effect of changes on the adoption, expansion and churn habits of customers. The ARR Schedule is a good place to track those cohorts.