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If you’re tracking revenue but still feel uncertain about next quarter, your ARR calculation may be the reason.
Annual Recurring Revenue (ARR) tells you how much predictable income your business can rely on over a year, but only when it’s calculated correctly. For subscription-based and SaaS businesses, ARR reflects long-term revenue health and growth momentum, helping you forecast budgets, secure investment, and make strategic decisions.
In this blog, we break down how to calculate ARR accurately, what to include or exclude, and how to use it for better planning.
Annual Recurring Revenue (ARR) is the total predictable revenue a business expects to earn over 12 months from active recurring contracts. It focuses only on revenue that repeats reliably, making it a dependable metric for forecasting and long-term planning.
ARR is most commonly used by subscription-based, SaaS, and contract-driven businesses, where customers pay monthly or annually for ongoing services or products.
ARR is built from revenue streams that are contracted and recurring, such as:
To remain accurate, ARR deliberately excludes any revenue that is not predictable or contractually recurring. This includes one-time setup or onboarding fees, professional services or implementation charges, usage-based or variable billing, and non-recurring product sales, as these do not reflect sustainable, repeatable revenue.
Now that you understand what ARR includes and excludes, it’s important to see how it differs from other revenue metricsand why that distinction matters for planning and growth.
Annual Recurring Revenue (ARR) focuses exclusively on predictable, contractually recurring revenue, making it a key indicator of sustainable growth. Other metrics, while useful, serve different purposes and can be misleading if confused with ARR.
For example, total revenue includes one-time sales and services, so it may look impressive in a quarter but doesn’t indicate long-term stability. Monthly Recurring Revenue (MRR) tracks the same recurring revenue on a monthly basis, giving short-term visibility, while ARR annualizes it for strategic planning.
Similarly, bookings reflect the total value of contracts signed, even if revenue hasn't been realized yet, while Annual Contract Value (ACV) measures the average value of individual contracts.
Here’s a quick comparison to clarify:
For businesses managing multiple revenue streams, HAL ERP helps structure recurring and non-recurring income clearly, so metrics like ARR, MRR, and bookings stay accurate and decision-ready without manual reconciliation.
Now that you understand what ARR is and why it matters, let’s dive into the exact methods to calculate it so your revenue forecasts are precise and reliable.
ARR calculations vary by your business model. The method depends on your billing structure, subscription types, and business model. Below are the most commonly used approaches:
Start by listing all recurring revenue sources. ARR only includes predictable income, such as:
Exclude one-time fees, variable usage charges, or non-recurring sales, as these do not contribute to predictable revenue.
For businesses with monthly billing cycles, ARR is annualized MRR:
ARR= MRR × 12
Example: If MRR = SAR20,000 → ARR = SAR20,000 × 12 = SAR240,000
This method is simple and widely used in SaaS businesses.
If customers sign multi-year contracts, calculate ARR by dividing the total contract value (TCV) by the contract length in years:
ARR= TCV/ Contract Years
Example: A 3-year contract worth SAR90,000 → ARR = SAR90,000 ÷ 3 = SAR30,000
This method is accurate for long-term agreements and ensures ARR reflects only annual recurring revenue.
Businesses with upgrades, add-ons, or churn should adjust ARR:
ARR = (Base ARR+Expansion ARR)−Churn ARR
Example: Base ARR of SAR150,000 comes from active subscriptions currently in place. During the year, upgrades and add-ons contribute an additional SAR20,000 in expansion ARR. At the same time, cancellations and downgrades reduce recurring revenue by SAR 10,000.
After accounting for both growth and churn, the total ARR stands at SAR160,000, representing the business's net predictable annual recurring revenue.
Some businesses combine monthly and annual subscriptions. The hybrid method:
This approach ensures ARR captures all recurring income sources accurately, giving a complete picture of predictable revenue.
Practical Tip: Track ARR monthly and annualize carefully to ensure forecasts match actual recurring revenue trends.
Once ARR is calculated accurately, the real value lies in how businesses use it to plan, comply, and grow, especially in a regulated market like Saudi Arabia.
For businesses operating in Saudi Arabia, ARR is more than a financial metric; it is a planning and compliance anchor. With evolving regulations, VAT reporting requirements, and growth aligned to Vision 2030, predictable revenue visibility is essential.
Here’s how accurate ARR directly benefits Saudi businesses in practice.
Many Saudi businesses rely on long-term contracts and recurring services. ARR gives leadership a clear view of predictable cash inflows, helping teams plan hiring, procurement, and expansion without depending on irregular revenue, critical for mid-sized firms with high operating costs.
ARR removes one-time revenue noise and shows what income can be consistently relied upon. This makes annual budgets, capital investments, and growth targets more realistic and easier to control throughout the year.
Accurate ARR tracking helps Saudi businesses clearly separate recurring and non-recurring income, reducing reporting errors and supporting cleaner VAT records. While ZATCA does not require specific software, structured revenue data simplifies audits and compliance reviews.
ARR reveals which services generate stable revenue, where churn impacts growth, and whether expansion plans are financially sustainable, especially important for companies scaling beyond 50 employees.
A well-documented ARR signals predictable revenue, improves valuation confidence, and strengthens discussions with banks, investors, and strategic partners.
Also Read: Financial Statements: The Cornerstone of Effective Business Management
After understanding how ARR is used, the next logical question is whether your ARR is growing at a healthy pace or signaling risk.
A “good” ARR growth rate depends on your business stage, industry, and market maturity. There is no single ideal number, but strong ARR growth consistently signals product demand, retention strength, and scalable operations.
Use this formula to find your ARR growth rate:
ARR Growth % = [(Current ARR - Previous ARR) / Previous ARR] × 100.
ARR growth rates reflect how healthy and scalable your recurring revenue model is. Growth above 50% typically indicates strong customer demand and high retention, often driven by renewals and upgrades.
A 30–45% growth rate is common for established businesses with larger revenue bases and signals steady, sustainable expansion. Growth below 20–30% may point to acquisition or retention challenges, especially if churn offsets new sales. Because growth naturally slows as ARR increases, the most effective benchmark is comparing your performance against peers in the same revenue stage rather than chasing a single target.
Knowing where your ARR stands is only half the work. The real impact comes from turning those insights into actions that steadily increase predictable revenue.
Improving ARR is less about aggressive selling and more about building stable, repeatable revenue streams. The most effective gains usually come from a mix of retention, expansion, and operational discipline.
Below are some practical actions that strengthen recurring revenue without increasing operational risk.
ARR grows faster when existing customers stay longer. Focus on contract clarity, consistent service delivery, and proactive issue resolution. Even small reductions in churn can protect a large portion of your recurring base over time.
Upsells, add-ons, or tier upgrades are often easier than acquiring new customers. Identify customers who already see value and offer extended services, higher usage tiers, or longer-term contracts.
Encouraging annual or multi-year agreements improves ARR visibility and stabilizes cash flow. This also reduces renewal risk and improves forecasting accuracy.
Clear, repeatable pricing reduces discounting and prevents revenue leakage. Consistent contract terms also make ARR tracking more accurate and comparable across business units.
Track new ARR, expansion ARR, and churn separately. This helps leadership understand what is driving growth and where intervention is needed before revenue erosion occurs.
Also Read: Best Accounting Software For Your Online Retail Business
Once ARR is understood, the real value comes from embedding it into daily decision-making. HAL ERP enables this by turning recurring revenue data into operational signals across the organization.
HAL ERP is an AI-powered enterprise resource planning solution built specifically for medium-sized businesses in Saudi Arabia. It integrates core business operations, such as accounting, invoicing, payroll, manufacturing, and industry-specific workflows, into a single, centralized system designed to improve efficiency, visibility, and control.
When it comes to recurring revenue, HAL ERP helps businesses move from tracking ARR in isolation to actively managing it within everyday operations.
Here’s how HAL ERP helps businesses operationalize ARR insights:
By embedding recurring revenue visibility directly into operational workflows, HAL ERP enables Saudi businesses to protect ARR, forecast confidently, and scale with clarity rather than complexity.
Annual Recurring Revenue provides a clear, forward-looking view of how stable and scalable your business really is. When tracked correctly, ARR helps leadership teams forecast cash flow, plan growth, and manage compliance with greater confidence.
However, its real value emerges only when recurring revenue data is connected to everyday operations, not managed in isolation. HAL ERP enables Saudi businesses to centralize, track, and operationalize ARR across contracts, reporting, and planning.
Book a demo and see how HAL ERP helps turn recurring revenue into a reliable foundation for long-term growth.
Annual Recurring Revenue (ARR) measures the predictable revenue a business expects to earn from recurring contracts over a 12-month period. It excludes one-time fees and variable charges to reflect stable income.
ARR includes only recurring, contract-based revenue, while total revenue also counts one-time sales, implementation fees, and usage-based charges. This makes ARR more reliable for forecasting.
No. ARR deliberately excludes one-time onboarding, implementation, professional services, and non-recurring product sales to avoid overstating predictable revenue.
While common in SaaS, ARR is widely used by businesses with recurring revenue models, including contracting, services, education, and managed operations, especially in long-term agreements.
ARR provides a stable revenue baseline that helps businesses plan budgets, manage cash flow, and assess growth sustainability without being distorted by irregular income.
