Why should MRR not be used for GAAP accounting?

Modified on: Tue, 22 Jun, 2021 at 12:57 AM

Generally Accepted Accounting Principles (GAAP) is a traditional accounting methodology that refers to a common set of accounting principles and standards issued by the Financial Accounting Standards Board (FASB). GAAP metrics do not consider delayed profitability into account. These metrics rely on the sales that have already been made. 

However, with the SaaS business, things are different. 

- To begin with, Monthly Recurring Revenue (MRR) is not a reportable GAAP revenue. The revenue is not calculated based on past sales, but current and predicted subscriptions. In simple terms, MRR is a predictable measure and not a recognized revenue. MRR calculates an expected revenue number to clarify where your company's performance is headed and indicates what you can expect based on the existing customers, sales, upgrades, churn, and so on. 

- Several metrics have been adopted across the SaaS industries to keep track of their business performance. Metrics such as Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Committed Monthly Recurring Revenue (CMRR), Churn, and so on have become standard when measuring the performance of a SaaS company. 

M
Monica is the author of this solution article.

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