By Sundack CPA | Reading Time: 5 minutes
Monthly recurring revenue (MRR) is an essential metric to consider. It's one of the most important metrics a managed service provider (MSP) or subscription-based business can track.
Yet, many don't do so close enough, and in some situations, that can leave your business at risk. Understanding what it is makes sense, but when you dive deeper, it provides even more information that can help you grow a successful business.
What is MRR?
MSP and subscription-based businesses depend on MRR, yet many organizations simply don't calculate it properly. When your business depends on your subscription rate, though, you need to get it right. Improperly attributing revenue, or not keeping accurate tally causes tax problems, or hinders your decision-making ability. At the very least, you're possibly misjudging your momentum and growth.
MRR is the amount of revenue under service agreements that will come in every month.
Calculating this figure helps you understand your business's profitability and cash flow as a subscription-based company.
When this figure is accurately measured, it helps you make accurate financial projections. In most cases, MRR is a relatively consistent number, based on how quickly you're growing.
The number changes, but those changes aren't wildly variable. For instance, if your MRR is $75,000 one month, it's likely to shrink or grow like your company. The next month it's possibly $80,000. Or if you have high churn, it could be 5-10% lower.
As you gain more consistent revenue, you'll then be able to model estimates of where your company will be going forward.
In short, a growing MRR is ideal. This metric provides insight into whether your SaaS business is growing. That's evident when your growth percentages are clearly represented in an MRR that is higher month-over-month.
Types of MRR
Most often, companies focus on their overall MRR. However, there are 5 types of MRR, and all of them may be valuable to you. Here's a look at the types of MRR.
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New MRR: This metric comes from new customers.
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Expansion MRR: This metric comes from existing customers that increase their purchase amount.
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Reactivation MRR: This metric provides insight into customers who left and are now returning.
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Contraction MRR: This metric measures the revenue you've lost from customers who are downgrading their purchase.
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Churned MRR: This is revenue lost from customers that leave your business.
Understanding each of these metrics helps you determine why your overall MRR is changing.
How Will MRR Help My Business?
It's more than just a static number that tells you how many people are using and benefiting from your service. It's important to have more insight into what's really happening within those numbers.
MRR helps you to track your sales and your overall company performance. Let's say that you notice a drop-off in a particular month. Service agreements for MSPs are at least 12 months or longer. If an MSP uses 12 month agreements, and the drop-off happens in February, look back to the previous year. If 5 clients signed in January, how many either renewed their contract, or continued paying month-to-month?
It's likely here where you'll find the issue.
When you calculate your MRR at this level, it gives you information that allows you to make adjustments to the sales process you have and, as a result, helps you reach your revenue goals and expectations.
In addition to this, it provides you with a way to create more accurate sales forecasts and projections. You can use your MRR as a revenue expectation -- you expect to receive these figures each month. You can then make decisions for your company based on that figure.
You're less likely to over or underestimate.
It also allows you to build a budget based on expected numbers. That's quite important, especially in startup and growing companies that may not have endless capital available to them. Knowing how much you will bring in each month helps you build a more accurate forecast and budget.
Ask Your Accountant for Help
MRR provides vital information about the health of your business. This is information your business needs to make wise financial decisions, manage future plans, and keep investors up-to-date on your growth.
Understanding the different types of MRR is essential because each one has a different function, and each one can be an indicator for knowing when a change in your business is needed. Without this information, you may be making guesses that don't always prioritize the best outcome for your business.
The key here is calculating those figures. How do you do this with accuracy?
Work with your accountant to get clear MRR insights. Your accountant can run through the numbers for you, making sure your MRR is on track and clearly understood. If there are concerns with it, you can easily gather more information about the reasons why using each of the various types of MRR and what they represent for your company.
With the help of your accountant, you can make sure your company's growth is heading in the right direction. The right partner understands the importance of monthly recurring revenue in your overall MSP. For instance, at Sundack CPA, we place recurring revenue as its own line item on your profit & loss statement.
We also understand that monthly recurring revenue has become a key component of your business value, in addition to your EBITDA, net margins, and your client retention rate. Knowing how much money is coming through the door each month provides consistent cash flow --- instead of counting on hardware sales and other time and material billing.
If your organization isn't tracking monthly recurring revenue properly or completely, you're not alone. We can help you. Contact Sundack CPA today to set up a consultation to discuss your company's accounting needs.