For a SaaS business, the statutory accounts tell you what happened. The SaaS metrics tell you whether the business is working. Founders who can speak fluently about ARR, MRR, churn, CAC and LTV, in language that matches what investors expect, run their fundraising processes more smoothly and tend to spot problems earlier. The definitions sound simple but are easy to get wrong.
Annual Recurring Revenue (ARR)
ARR is the annualised value of contracted, recurring revenue at a point in time, excluding one-off fees, professional services and non-recurring elements. A SaaS company with 100 customers each paying £1,000 per month has an ARR of £1,200,000. The key word is recurring: only revenue that the customer is contractually expected to continue paying counts.
Common mistakes we see:
- Including setup or implementation fees, which are one-off.
- Including paid pilot or POC revenue that will not roll into a subscription.
- Failing to remove the ARR of customers who have given notice of cancellation, even if cash is still being collected during the notice period.
Monthly Recurring Revenue (MRR)
MRR is the same concept on a monthly basis. ARR divided by 12. Most internal SaaS reporting uses MRR for operational tracking and ARR for board reporting. MRR is broken down into new MRR (from new customers), expansion MRR (from existing customers upgrading), contraction MRR (downgrades) and churned MRR (cancelled subscriptions). The net change in MRR for the period is one of the most informative numbers on a SaaS dashboard.
Churn
Churn is the rate at which customers or revenue leave the business. Two distinct definitions are commonly used:
- Logo churn: The percentage of customers who cancel in a period. Calculated as customers lost divided by opening customers.
- Revenue churn: The percentage of recurring revenue lost in a period. Calculated as MRR lost divided by opening MRR.
For SaaS businesses with a mix of customer sizes, revenue churn often differs materially from logo churn. A business with stable small customers but a single large one departing will look healthy on logo churn but disastrous on revenue churn.
Net revenue churn is revenue churn minus expansion revenue. A negative net revenue churn rate (more expansion than contraction and lost MRR) is the holy grail of SaaS metrics and indicates that existing customers grow faster than churn erodes the base, even before new customer acquisition.
Customer Acquisition Cost (CAC)
CAC is the average cost of acquiring a new customer, calculated as total sales and marketing spend in a period divided by new customers acquired in that period. Sales and marketing spend should include salaries, commissions, paid acquisition, content and tooling. Common errors include allocating only paid advertising (understating CAC), failing to attribute back-office time spent on customer onboarding (also understating CAC) and using gross rather than net new customers.
Customer Lifetime Value (LTV)
LTV is the gross profit a customer is expected to generate over the duration of the relationship. A simple, defensible approximation is gross margin multiplied by ARPU divided by churn rate, where ARPU is average revenue per user. The LTV-to-CAC ratio is one of the headline numbers investors examine. Ratios above 3.0 are typically considered healthy at scale, though early-stage businesses often run lower while investing in growth.
Payback period
Payback period is the number of months it takes for the gross profit from a new customer to recover the CAC. Calculated as CAC divided by (ARPU multiplied by gross margin). Payback is more visceral than LTV/CAC because it speaks to working capital. Most healthy SaaS businesses target a payback under 18 to 24 months for SMB customers and 36 months or less for enterprise.
Reporting hygiene
The single most important discipline around SaaS metrics is consistency. Reporting ARR one way to the board, another way to investors and a third way internally destroys trust. Document your definitions, apply them consistently and review them annually. A definition change should be flagged, with prior periods restated.
Where the statutory accounts fit
SaaS metrics and FRS 102 revenue do not always reconcile cleanly. ARR is a forward-looking snapshot, revenue in the accounts is a backward-looking total. Bridging the two is a useful discipline for an FD or external accountant. Deferred income on the balance sheet should be broadly consistent with the ARR booked but not yet recognised.
How PushDigits supports SaaS clients
We work with SaaS founders to define the metrics, build the underlying reporting and reconcile them to statutory accounts. We also help with the data hygiene work required ahead of a fundraise. See our business advisory and annual accounts pages, or contact us to talk about your reporting.