ARR vs revenue: why your two numbers never match

ARR (annual recurring revenue) is the yearly value of the subscriptions you have running on one day. Revenue is what you actually earned over a period, measured under US GAAP. A company can close a year with $115,000 of revenue and $144,000 of ARR, and both numbers are correct.

Founders get asked for both, often in the same meeting, and the gap between them is where an investor's questions start. Knowing exactly why your two numbers differ, and being able to show the bridge from one to the other, is what makes the ARR on your pitch deck believable.

What ARR measures

ARR is a snapshot. Take every active recurring contract on a given date, convert each one to its annual value, and add them up. A customer paying $5,000 a month is $60,000 of ARR. A customer on a $48,000 annual contract is $48,000 of ARR, whether they paid up front, quarterly or not yet.

Three things follow from that definition:

• It is forward-looking. ARR says what the next twelve months would bring if nothing changed: no new customers, no churn, no price increases.
• It counts only recurring subscription fees. One-time implementation fees, consulting projects, hardware and pilots that have not converted into a subscription are left out.
• It is not defined by any accounting standard. GAAP has no rule for ARR. Each company writes its own definition, which is why a careful investor asks for yours before comparing your number with anyone else's.

A related number is MRR, monthly recurring revenue. For a company with only monthly and annual subscriptions, ARR is simply MRR × 12.

What revenue measures

Revenue is historical and it follows a rule. Under ASC 606, Revenue from Contracts with Customers, you recognize revenue as you deliver what the customer paid for. For a SaaS subscription, the customer gets access every day of the term, so revenue is recognized evenly across it.

That means revenue depends on when a contract started, when services were delivered and how long the period is. It does not care when cash arrived: a $24,000 annual prepay is $2,000 of revenue a month, with the rest sitting in deferred revenue until it is earned.

Revenue also includes everything you earned, recurring or not. The implementation project, the paid pilot and the training workshop are all revenue in the period you delivered them.

A worked example: five contracts, one year

Here is a fictional seed-stage company's 2026, with calendar-year books. Customers A, B and C are annual subscriptions. Customer D ran a six-month paid pilot and did not convert. Customer E bought a one-off data migration project, a distinct service delivered in March.

The two totals differ by $29,000, and every dollar of the gap has a reason:

• Late starts. B and C each count their full annual value in ARR on December 31, but they were live for six months and three months, so they earned $24,000 and $9,000 of revenue. Together that is $51,000 more ARR than revenue.
• Non-recurring revenue. D's pilot and E's project earned $22,000 of revenue and contribute nothing to ARR, because neither will repeat.

$51,000 − $22,000 = $29,000, which is exactly the gap.

There is a simple consistency check hidden in this table. December's recognized subscription revenue was $5,000 from A, $4,000 from B and $3,000 from C: $12,000. Multiply by twelve and you get $144,000, the ARR. When your ARR is higher than the latest month's recognized subscription revenue times twelve, the difference has to be explained by contracts that started partway through that month, or by discounts and free months that your ARR counts at full price, and you should be able to name them.

Why the two numbers drift apart

The example shows the two most common causes. In a real company there are a few more:

• Timing. A fast-growing company always has ARR ahead of trailing revenue, because the newest contracts count in full on day one of ARR and only a sliver of them has been earned.
• One-time fees. Setup, onboarding and professional services are revenue, not ARR. Under ASC 606, a setup fee that is not a distinct service is usually recognized over the subscription term rather than up front, which makes the revenue side smoother still.
• Churn. A customer who cancels on December 15 contributed eleven and a half months of revenue and zero ARR on December 31.
• Discounts and free months. A 12-month contract at $12,000 with the first two months free brings in $10,000. ASC 606 spreads the $10,000 across all twelve months. Some companies count $12,000 of ARR because that is the renewal price, and some count $10,000. Pick one, write it down, and apply it every time.
• Ramps and multi-year deals. A three-year contract at $30,000, $40,000 and $50,000 has $30,000 of ARR in year one. Its revenue may be recognized more evenly across the term, depending on the contract terms, so revenue can run ahead of ARR early on. This is a judgment call worth taking to your accountant.
• Usage-based pricing. Variable usage fees are hard to annualize honestly. The conservative approach counts committed minimums in ARR and treats usage above them as revenue only.

Contracted ARR, run rate and other look-alikes

Several numbers get called ARR in pitch decks. They are not interchangeable:

• Contracted ARR (CARR) adds contracts that are signed but not yet live. If a Customer F signs on December 15 for $30,000 a year starting February 1, the example company has $144,000 of ARR and $174,000 of CARR on December 31. CARR is a fair number to show as long as it is labelled as such.
• Revenue run rate is the latest month's (or quarter's) total revenue annualized, one-time fees included. For the example company, a December with no one-off revenue gives the same $144,000. In March, E's $10,000 project would have inflated it by $120,000. That is why a run rate is not ARR.
• Bookings are the total value of contracts signed in a period, including multi-year values. A $150,000 three-year deal is $150,000 of bookings and $50,000 or less of ARR.
• Billings are what you invoiced. An annual prepay makes billings jump in the month you invoice, and says little about ARR.

Using the wrong one is not a rounding problem. It is the kind of mismatch that turns up in diligence when someone rebuilds your ARR from the contracts and your revenue from the general ledger.

How to report ARR so investors trust it

An ARR number holds up when it is defined, reproducible and reconciled.

1. Write your definition down. One paragraph: what counts (recurring subscription fees on active contracts), what does not (services, pilots, usage above commitments), how you treat discounts, and the date you measure on.
2. Keep an ARR bridge. For each month or quarter, show starting ARR, new, expansion, contraction and churn, and ending ARR. For the example company's fourth quarter: starting ARR of $108,000 on September 30 (A and B), $36,000 new from C, no expansion or churn, ending ARR of $144,000.
3. Reconcile to GAAP revenue. Show that the latest month's recognized subscription revenue, times twelve, lands on your ARR, and explain any difference contract by contract. The investor is testing whether the metric and the books describe the same company.
4. Build it from the ledger, not a spreadsheet of hopes. ARR computed from signed contracts and revenue recognized from the same contracts cannot drift apart without a reason you can point to.

Your revenue number needs the same discipline: monthly closes, subscription revenue recognized ratably, and deferred revenue on the balance sheet. That is the part LedgerIt does for you: agents keep the books to GAAP each month, so the ARR in your deck and the revenue in your financials come from the same records.

What to do this month

• Write a one-paragraph ARR definition and share it with your co-founders, so everyone quotes the same number.
• List every active contract with its annual recurring value, and total it. That is your ARR today.
• Check that last month's recognized subscription revenue × 12 is close to that total, and list the contracts that explain any difference.
• Pull one-time fees, pilots and services out of the ARR total if they crept in.
• Start an ARR bridge (starting, new, expansion, contraction, churn, ending) and update it at every month-end close.
• Label contracted ARR and run rate as what they are wherever they appear in your deck.