MRR vs revenue: why your MRR isn’t your GAAP revenue

01Two different questions#

MRR answers “what is the recurring business worth per month, right now?” It is measured on a date: add up the monthly value of every active subscription, annual plans divided by twelve. ARR is the same thing times twelve. Neither is defined by US GAAP. Each company chooses its own definition, which is why investors ask for it.

Revenue answers “what did we earn over this period?” Under ASC 606, revenue is recognized as you satisfy your performance obligations to the customer. A subscription is satisfied over time, so its revenue is recognized ratably across the service period, day by day or month by month, regardless of when the invoice went out or the cash came in.

02A worked month#

Take an illustrative company at the end of September with three customers, in round numbers:

MRR at September 30 is $6,000: A’s $1,000, B’s $24,000 divided by twelve, and C’s full $3,000, because C is active on that date. Recognized revenue for September is $4,100: A’s $1,000, one month of B at $2,000, and eleven of thirty days of C, $1,100. Cash collected in September is $28,000: A’s $1,000, B’s $24,000 and C’s first $3,000.

Three figures for the same month: $6,000 of MRR, $4,100 of revenue and $28,000 of cash. The gap between cash and revenue is deferred revenue on the balance sheet, $22,000 still owed to B and $1,900 to C, a total of $23,900. Cash of $28,000 equals revenue of $4,100 plus deferred revenue of $23,900, which is the check that the books are right.

• Customer A pays $1,000 a month, billed monthly.
• Customer B prepaid $24,000 for a year starting September 1.
• Customer C signed on September 20 at $3,000 a month, billed in advance.

03Annual prepayments#

Annual plans are where MRR, revenue and cash drift furthest apart. On the day B paid, the entry was: debit Cash $24,000; credit Deferred revenue $24,000. Each month after: debit Deferred revenue $2,000; credit Subscription revenue $2,000. MRR counts B at $2,000 from day one, revenue earns $2,000 a month, and the cash all arrived in September.

That is why a company that pushes annual prepayments sees its bank balance jump while revenue rises steadily. Both are good news, and neither should be called the other. A month where the board deck says revenue tripled and the income statement says it rose 8% is a month where someone booked a prepayment as revenue.

04Churn, contraction and expansion#

MRR moves in steps on the date a change takes effect: a new customer adds their full monthly value, an upgrade adds the difference, a downgrade or cancellation removes it. Revenue moves in proportion to the days of service actually delivered. A customer who cancels effective September 15 leaves MRR on the 15th and contributes half a month of revenue in September.

The usual way to present MRR is a movement schedule: opening MRR, plus new, plus expansion, less contraction, less churn, equals closing MRR. Each line should be traceable to specific customers in the billing system. If the movement does not foot to the closing figure, the definition is being applied inconsistently.

Refunds and credits show up in revenue, not necessarily in MRR. A refund reduces revenue in the month it is granted; a service credit may reduce it too. Neither changes the run-rate unless the price changed.

05What revenue includes that MRR does not#

The reconciling items between MRR and revenue fall into a few groups. Each one belongs on the bridge:

• Partial months: new customers and cancellations recognized for the days served, not the full month.
• One-time fees: setup and implementation, recognized under your ASC 606 policy, often over the term if not a distinct service.
• Professional services: recognized as delivered, and usually excluded from MRR.
• Usage and overages: revenue when used; in MRR only if your definition says so.
• Discounts, refunds and credits: reduce revenue when granted.
• Non-subscription revenue: hardware, licenses, consulting.

06Why investors want both, reconciled#

MRR is how investors value a recurring business: it shows the run-rate and the momentum. Revenue is how they check it: it is computed under a standard, recognized from contracts, and reviewed by a CPA. A company that reports both and can bridge them is believed on both. A company whose MRR cannot be tied to revenue has a definition problem, a billing problem or a books problem, and diligence will find out which.

Public companies that publish a non-GAAP measure must reconcile it to the most comparable GAAP measure under the SEC’s Regulation G. A startup is not subject to that rule, but the habit is the same one investors expect: label every metric, state its definition, and show how it reaches the GAAP number.

07Building the bridge each month#

A practical monthly routine:

• Write down your MRR definition once: what counts, when a customer enters and leaves, how annual and multi-year plans are converted.
• Pull MRR from the billing system at month end and the movement schedule beside it.
• Pull recognized subscription revenue from the income statement for the same month.
• List the reconciling items: partial months, one-time fees, services, usage, credits.
• Tie deferred revenue on the balance sheet to the schedule of prepaid contracts.
• Keep the bridge with the close, so the next board deck and the next diligence request use the same numbers.