Mastering multi-subsidiary ARR: A comprehensive guide for SaaS companies

Annual recurring revenue (ARR) is arguably the most important metric for all SaaS companies as it helps measure growth, forecast future revenue, and gauge overall business health. 

However, this seemingly straightforward task of tracking and reporting ARR can become surprisingly complex depending on the size of the company, pricing models, the geographies it is present in, the currency used in different geographies, and customer decisions (upgrade, downgrade, cancellation).  

This article discusses each of these challenges and the various methodologies for calculating ARR to ensure accurate, consistent ARR reporting across your organization.

While the fundamental formula for annual recurring revenue (ARR) remains constant, SaaS companies often employ various methods to analyze and interpret it. The logic behind it is rather simple—different calculation methodologies can unveil unique insights about your SaaS business's performance, growth trends, and potential challenges.

By examining ARR through multiple lenses, companies can uncover hidden patterns, identify areas for optimization, and make more informed strategic decisions.

Note that these 'methodologies' do not really alter the basic ARR formula; they are only different perspectives on interpreting your recurring revenue data. 

Component-Based ARR Calculation

Component-based ARR calculation uses the same formula of ARR as mentioned above. It is simply worded differently, as given below:

The variables used here are:

• Prior period annual subscription revenue: Represents the stable subscriptions of recurring revenue from existing customers. These customers remain in the same pricing tier (if applicable) as they haven’t upgraded or downgraded their subscription. 
• New revenue : Revenue generated from newly acquired customers.
• Expansion revenue: Additional revenue from existing customers who have upgraded their subscriptions or have purchased add-on features/products (if applicable).‍
• Churned revenue: Revenue lost from customers who have canceled their subscriptions entirely. In some cases, companies have a freemium model where they don’t consider a customer to be lost if they decide to churn during their trial period or in the ‘free’ plan. They only count it as revenue if the customer pays and churned if that paying customer stops the subscription.

This methodology allows companies to analyze the health of their recurring revenue from multiple angles. 

Companies can also take this model further by refining it to suit their specific needs. For example, they can separate expansion revenue into upsells, cross-sells, and usage increases.

Contracted Annual Recurring Revenue (CARR)

Contracted annual recurring revenue (CARR) is a more forward-looking metric that includes all ‘contractually guaranteed’ recurring revenue. This means it accounts for agreements that future customers have signed even if they haven’t started their subscriptions/used your product yet. 

The basic formula is:

This approach is particularly useful for: 

• High-growth SaaS companies: Such companies may often sign many new contracts rapidly, and CARR helps them show the full picture of their growth trajectory, including future committed revenue.
• Complex products requiring setup and training: For products that need significant handholding and implementation time, there can be a substantial gap between contract signing and when the customer starts actively using (and paying for) the service. CARR helps bridge this gap in reporting.
• Enterprise-focused companies: Enterprise clients often require extensive customization, integration, and training before fully adopting a new software solution. This can lead to longer wait periods between contract signing and revenue recognition, making CARR particularly relevant.

While CARR does provide valuable insights into future revenue potential, it should be used cautiously. It does not account for potential implementation failures or cancellations before the start date and may overstate near-term revenue expectations if not properly contextualized.

Pro-rating for mid-year changes

Customer behavior rarely aligns perfectly with annual billing cycles. Subscribers may decide to upgrade, downgrade, or even cancel their plans at any point during their subscription period. To accurately reflect these changes, many companies employ pro-rating in their ARR calculations.

Pro-rating enables companies to adjust the ARR based on the timing of subscription changes, providing a "closer-to-reality" picture of recurring revenue. 

• Upgrades and downgrades: Let’s say that a customer upgrades mid-year from a $1,000/year plan to a $1,500/year plan; the pro-rated ARR increase would be $250 (half of the $500 difference). The additional revenue is simply calculated proportionally for the remaining period. Similarly, downgrades are pro-rated to reflect the reduced revenue for the remainder of the subscription period.
• Churn: When a customer churns, their contribution to ARR is reduced accordingly — based on when they stopped during the subscription period.
• New customers: For customers joining mid-year, their ARR contribution is adjusted based on their start date.

Foreign exchange adjustments and pricing models

Most growth-stage (and even early-stage) SaaS companies have international operations and subsidiaries. This means revenue is generated in different foreign currencies, adding to the complexity of ARR calculations via foreign exchange gains and losses. 

Varied pricing models across different markets or product lines are further complications of the ARR process. Companies often need to make adjustments to address these challenges, keep track of ARR, and ensure transparency in financial reporting.

It is wise for companies to convert all ARR figures to a single, standard currency using current exchange rates, typically the parent company's functional currency. Typically, standard accounting practices, including GAAP and IFRS, influence the use of spot rates, average rates, or historical rates for these conversions. 

It is important to recognize that significant currency fluctuations can impact ARR trends and overall revenue when viewed in the functional currency. To ensure transparency and accurate interpretation, companies should clearly communicate their foreign exchange (forex) adjustment methodology. 

ARR growth rate

ARR growth rate is a vital metric for SaaS businesses, providing crucial insights into the pace of revenue expansion. It measures the percentage increase in recurring revenue base over a specified period, typically year-over-year. 

The formula is:

For example, if a company's ARR grew from $10 million to $15 million in a year, the ARR growth rate would be 50%.

Here’s why ARR growth rate matters: 

• Performance indicator: ARR growth rate is a clear indicator of a company's ability to scale its recurring revenue, which is a critical factor for SaaS businesses.
• Trend analysis: By tracking this metric over time, companies can identify growth trends, seasonal patterns, and potential slowdowns (if any).
• Forecasting: Tracking the ARR growth rate helps predict future revenue and set realistic growth targets.
• Investor interest: High ARR growth rates often attract investor attention, particularly for upcoming/high-growth companies.
• Competitive benchmarking: Knowing their ARR growth rate allows companies to compare their growth against industry peers. 
• Strategic planning: Tracking ARR growth rate can help identify strategic adjustments in areas such as marketing, sales, or product development.

While the ARR growth rate is an essential metric, it's important to consider it alongside other factors, such as customer acquisition costs, churn rate, and expansion revenue, to get a clearer picture. 

Why do you need to track and report the ARR for your SaaS company’s subsidiaries? 

Tracking and reporting ARR for each subsidiary is crucial to comprehensively understanding the company's overall financial health. 

The primary goal is to ensure that all revenue data, regardless of its country of origin or currency, is converted into a uniform metric — essentially converting all the "apples and oranges" into the same fruit. This standardization exercise allows for proper comparison and analysis across the entire organization.

Let’s consider a scenario in which a parent company has four subsidiaries: A, B, C, and D. If each subsidiary contributes equally to the company's financial performance, we could assign each a value of 1. In this ideal case, the company's overall financial performance would equal 4.

However, the reality is often more complex:

• Subsidiary A might be struggling with a negative ARR (-0.5)
• Subsidiary B could be exceeding expectations (1.5)
• Subsidiary C might be performing as expected (1)
• Subsidiary D could be slightly underperforming (0.8)

In this case, summing the contributions of all four subsidiaries would show that the company's overall financial performance is 2.8.

This scenario illustrates how each subsidiary's performance directly impacts the parent company's financial health. 

By closely tracking and reporting ARR for each subsidiary, you can make informed decisions about resource allocation, identify areas of improvement across subsidiaries, and also get an overall view of the company's financial health. 

Mastering multi-subsidiary ARR tracking for strategic growth

It is important for SaaS companies to understand the need to view ARR from various angles. Depending on their specific strategic requirements, business leaders can decide which methodology suits them the best. 

It is also crucial for SaaS businesses to standardize ARR calculations across subsidiaries for accurate financial reporting. By implementing consistent methodologies, these companies can ensure that data from different subsidiaries is comparable and can be consolidated effectively. 

Standardized ARR calculations enable more precise financial forecasting, facilitate meaningful comparisons between subsidiaries, and provide a solid foundation for strategic decision-making at both the subsidiary and parent company levels.

Navigating these complexities can be challenging; however, SaaS financial planning software like Drivetrain can significantly streamline the process. 

‍Drivetrain is a robust, third-generation FP&A solution, with a flexible platform that allows business leaders to customize ARR analysis. With over 200 integrations, the software can  seamlessly integrate with various systems and consolidate all the necessary metrics, in real time, to create a single source of truth. 

It supports standardization across different currencies and pricing models, providing real-time insights for timely decision-making. By leveraging Drivetrain's financial forecasting tools, companies can turn the challenge of multi-subsidiary ARR tracking into a strategic advantage, thereby driving growth and financial stability.

‍Discover Drivetrain to see how you can get actionable insights into your business performance faster.