Do you get ARR-bridge from your accounting firm?

ARR bridge (or MRR bridge) is an excellent tool to monitor the development of a SaaS business. It gives you an at-a-glance overview of how the company’s SaaS revenue is evolving. The ARR bridge breaks down the change in Annual Recurring Revenue (ARR) into the following components:

• New clients (new)

• Expansion from existing customers (upsell)

• Contraction from existing customers (downsell)

• Churned customers (churn)

In the image, the development of the last 12 months’ (LTM) ARR is presented in the form of an ARR bridge.

It’s best to collect the required data on a monthly basis for an ARR bridge. Gathering this data is typically manual (especially in the early stages of a company), and besides being time-consuming, it’s also prone to errors. While dealing with other urgent matters, the data often ends up not being collected at all, or the figures are unreliable. Nonetheless, it’s worth the careful effort, because the ARR bridge contains exactly the information investors want to see about a company’s SaaS business. It’s also an excellent internal monitoring tool for example for board reporting.

A capable accounting firm can help a SaaS company with this process. By integrating data collection into the month-end closing process done with the accounting firm, the process can be automated and the reliability of the data improved. Before the month-end close, the accounting firm should provide the following preliminary SaaS revenue data:

• SaaS revenue from new customers (new candidates)

• SaaS revenue that has changed from the previous period (upsell/downsell candidates)

• SaaS revenue that has ended (churn candidates)

Each category should form a list showing the customer and the customer-specific change in SaaS revenue. With a well-prepared list, the company can easily validate the information needed for the ARR bridge, while also catching any potential accounting errors in time. Among new customers, there may be revenue that actually belongs to a different account (e.g. onboarding), and in the churn list there may be missed invoices that should still be billed.

Reviewing this data before the month-end close allows for timely corrections of errors and prevents unnecessary fluctuations in SaaS revenue that would otherwise occur if mistakes are fixed later. This is also important because obscure variations in SaaS revenue can raise doubts among potential investors. Simply explaining accounting errors does not necessarily restore trust.

When collecting ARR bridge data, it’s also convenient to maintain a list of churned customers, including the reasons for their departure. You will certanily need a comprehensive churn list when negotiating with investors or potential acquirers.

Providing ARR bridge data is generally not part of a standard accounting firm’s services, but a knowledgeable firm that speaks fluent SaaS will include this as part of its standard package. It’s important for a SaaS business to confirm that its accounting firm has SaaS experience – and to consider switching service providers if they don’t.