ARR

ARR is an acronym that can refer to several concepts across business, finance, and technology. The two most common meanings are Annual Recurring Revenue, used by subscription-based businesses, and Accounting Rate of Return, a capital budgeting metric. In some contexts ARR also stands for Annual Run Rate, a rough projection of annual performance based on current results.

Annual Recurring Revenue is a metric that measures the value of recurring revenue from active subscriptions over a one-year period. It is often derived from monthly recurring revenue (MRR) multiplied by 12, or by annualizing contract values for customers with ongoing commitments. ARR excludes one-time fees, professional services, and non-recurring revenue. It is used to assess growth, forecast future revenue, and compare performance across periods or against targets. Limitations include sensitivity to churn, price changes, discounts, and upsell activity, as well as its focus on recurring revenue rather than total cash flow or profitability.

Accounting Rate of Return is a profitability metric used in capital budgeting. It estimates the percentage return on an investment based on accounting profits rather than cash flows. ARR is typically calculated as the average annual accounting profit divided by the average amount of investment over the project’s life. It does not account for the time value of money and depends on accounting conventions, which can affect comparability. Despite limitations, ARR can provide a quick, rule-of-thumb assessment for screening investment opportunities.

Ambiguity can arise from context, as ARR has multiple legitimate meanings across disciplines. When using the term, it is helpful to specify which definition is intended to avoid confusion.