Annual Recurring Revenue (ARR) is more than just a finance metric—it's a clear signal of a SaaS company's health, growth, and valuation potential. If you're a finance leader navigating investor updates, board reporting, or strategic planning, ARR is your go-to metric. But what exactly makes up ARR—and why should you track each component?

This quick guide breaks down the core components of ARR and why it matters for SaaS CFOs and finance teams.

What Is ARR?

Annual Recurring Revenue (ARR) is the predictable, subscription-based revenue your SaaS company expects over a 12-month period. It excludes one-time charges, setup fees, and variable usage, giving you a clean baseline for recurring revenue.

ARR is a leading indicator of business performance and is crucial for:

• Forecasting growth
• Measuring customer value
• Supporting valuations and fundraising
• Guiding product and pricing strategy

The Four Core Components of ARR

At TrueRev, we treat ARR as a living formula, not a static number. Here’s how it's built:

New ARR

Revenue from brand-new customers. This is your primary growth engine and reflects your sales and marketing effectiveness.

Expansion ARR

Revenue increases from existing customers—think plan upgrades, added features, or more user seats.

Contraction ARR

Revenue lost when customers downgrade or reduce usage. They haven’t churned but are now paying less.

Churned ARR

Revenue completely lost when a customer cancels their subscription.

ARR Formula at a Glance

ARR = New ARR + Expansion ARR – Contraction ARR – Churned ARR

Tracking this formula consistently helps you identify whether growth is driven by acquisition or customer success—and where to improve.

Why ARR Matters for SaaS Finance Teams

ARR is more than a backward-looking metric. It’s a strategic tool that powers:

• Accurate revenue forecasting
• Clearer valuation metrics for investors
• Smarter retention and upsell strategies
• Data-backed product decisions

Say Goodbye to Spreadsheet Chaos

Still managing ARR in spreadsheets? You’re not alone—but there’s a better way.

TrueRev connects directly with your accounting and CRM tools to automate ARR calculations and visualize key trends in real time. You get clarity, not chaos—and more time for strategic planning.

Conclusion

‍ARR is your North Star for SaaS growth. By understanding and tracking its core components—New, Expansion, Contraction, and Churned ARR—you can make more confident decisions across your business.

👉 Want to dive deeper? Read the full SaaS School article or book a live demo at TrueRev.com to see how we turn ARR into your strategic edge.