# How To Forecast Annual Recurring Revenue

When it comes down to it, predicting how much revenue an organization will receive in future years is very difficult. This is especially true for bigger organizations that have fluctuating income!

Annual recurring revenues (ARR) are those that keep coming back every year without you having to work hard to get them each time. For example, if you use our free online course platform regularly, this would be considered annual recurring revenue.

You could also say that these types of services are “built” upon past performance so they create more certainty around what money there will be in the future.

Most businesses rely heavily on ARRs to survive. By forecasting how many dollars you can expect from these services, you can plan your business strategy with greater confidence.

In this article, we will look at some easy ways to forecast yearly income for any type of business. We will focus mostly on monthly incomes but all industries can apply here!

I’ll include examples using my own experiences as well as others’.

## Calculate the growth rate of your revenue

The second way to forecast annual recurring revenue is by calculating the growth rate of your revenue. This can be done through either comping with past years’ revenues or comparing it to another segment within your business.

By comparing your own internal data, you can determine what an appropriate comparison group is for recurrent income. For example, if your product line has a monthly subscription service, then marketing software companies would make a good comparison group as they are also in the market to make money through subscriptions.

If you compare your own internal data to past years’ data, you can find average growth rates for yourself and the other company. Then, apply that same ratio to the current year’s revenue to get an estimated value for how much new revenue you will earn this year.

This method does not require any external sources for numbers, which is one of the major benefits of this approach.

## Make a guess for the future growth rate

The second way to forecast recurring revenue is by estimating how much revenue you expect to get in the future. This can be done using different methods, such as looking at past performance, doing an extrapolation, or forecasting what market trends predict.

When doing an extrapolation, like when predicting annual recurring revenue, you have to make sure that your assumptions are stable and reliable. For example, if you assume that monthly subscription fees will remain the same, then you must make sure that this assumption has been confirmed before relying upon it.

If you do not confirm this assumption, then your numbers may not even matter because you would overestimate the amount of income received!

Extrapolations should be from known data that has shown steady growth over time and cannot contain any major changes. Predictions that rely on predictions are very risky, and it is better to just go with the safer option – knowing how much money you receive now.

These two strategies for forecasting recurring revenue can easily be adapted to fit almost every type of business.

## Multiply the current growth rate by the future growth rate to get your predicted future growth

Now that you have determined how much revenue will be generated in the upcoming months, you can begin forecasting what the yearly income will be! To do this, you need to know two things: how fast the company’s growth has been over the past year, and how quickly it grows each month of the next twelve months.

By multiplying these two numbers together, you come up with an estimated annual recurring revenue (ARR) number. The average monthly revenue for most companies is around \$6,000 per month, making 12 times that amount = \$72,000.

So, using our car analogy again, if a business had the same model as yours but was sold twice a year instead of every three months, then its ARR would be only half of yours! This makes sense because people purchase cars more frequently than they do vehicles.

## Subtract your predicted future growth from your historical growth to get your forecasted annual recurring revenue

Now that you have determined how much online shopping you will do in the coming year, you can move onto the next step which is figuring out how much income your business will make. This is referred to as forecasting your annual recurring revenue (ARR).

Most businesses that survive more than a few months depend almost entirely upon their ARR for their very existence. Without enough money coming in every month or week, they would not be able to pay their bills!

So, when it comes time to plan for the year, don’t just add up what you think you’ll spend and see where it takes you — also include your projected monthly expenses! By adding both numbers together, you’ll find that there isn’t quite enough cash left over to really keep the lights on.

It is important to be aware of how forecasts are influenced by past performance. Because annual recurring revenue (ARR) contracts, there can sometimes be a tendency to assume that what worked in the past will work this year too.

That is not a good assumption because it assumes things will keep happening at the same rate. In addition, it may also create a false sense of security since you’ll believe the contract won’t end until later.

If we were to do an ARR forecast for a company with very strong yearly sales cycles, then we would need to make sure we have enough time to account for any delays or disruptions. This could mean adding extra time to our projection if necessary!

Another key thing to remember about forecasting ARRs is that they fluctuate from year-to-year. Some years, even months, might see higher than average monthly revenues due to some special events occurring around the holiday season or other products coming into effect.

While this is great to enjoy, it makes calculating an average much more difficult. The best way to approach this is to use either a moving average or another formula depending on which one seems most appropriate.

There are many ways to predict ARRs so pick one that works well for you and stay consistent with it.

## Create a forecast for each of your products

Only estimate how much revenue you will get from a product if it is still in the monthly spending cycle, not when it enters into an annual spending cycle. This way, you can update your forecasts as needed!

Products with limited time frames (such as a monthly subscription) do not require yearly projections because they are always projected for one year at a time. Monthly subscriptions typically have a longer service period than a yearly membership, so their projection does not change very often.

Annual memberships, however, spend more money every year due to the higher price tag, so their forecast changes more frequently.

By having separate forecasts for both types of products, you make sure that your numbers are accurate!

Tip: Make sure to factor in discounts When forecasting future revenues, be aware of discount programs or coupons that your business may offer its customers.

Some companies give away free merchandise during certain times of the year, suchas during the holidays. These giveaways can save you money by buying less expensive items, and thus requiring a smaller budget for the upcoming year.

When you have new products or services, it is very difficult to predict how much revenue they will generate. This is why most entrepreneurs fail! They expect their business to keep running without any maintenance or restocks.

This isn’t good news if you are planning on keeping your current level of income, nor if you want to add new features to your service. The more prepared you are for the times when revenues drop, the better!

By creating forecasts for each product or feature you offer, you can prepare in advance by taking appropriate action. If you notice that sales are down for one item, you can quickly find out what caused the downturn and fix the problem (by lowering prices, offering discounts, etc.).

You could also add additional services or features that help promote sales of the remaining items. By doing this ahead of time, you won’t be forced to make changes at the last minute, which could cost you money.

## Create a forecast for each of your subscription plans

There’s no reason to forecast monthly revenue, there are already numbers in place to calculate that! Monthly subscriptions just don’t make sense when you think about it — we know how much money you have coming in every month, why would you need an estimate?

So what about annual recurring revenue (ARR)? This is simply referring to the yearly cost of a plan, not including any additional expenses such as marketing or launch fees.

By forecasting only the ARR, you can more accurately predict if you will achieve profitability or break-even with this business model. You can also identify whether or not you should continue offering these services or look into alternative monetization strategies.

There are two main reasons why most entrepreneurs fail to do this – they don’t put enough effort into it or their forecasts aren’t very accurate.