After 10 years running a B2B SaaS company and now building another one, I'm still surprised by how often people confuse Monthly Recurring Revenue (MRR) with actual revenue. I've seen experienced finance professionals, investors, and even seasoned SaaS founders make this mistake.
Let me clear this up once and for all.
What MRR Actually Measures
MRR is a measure of the value of your subscription contracts, normalized to a monthly figure. It's not what you recognize as revenue in your accounting books - it's a forward-looking metric that tells you the health of your subscription base.
Think of MRR as answering the question: "If I stopped all sales and marketing today, how much recurring revenue would flow in each month?"
The Classic Edge Case: The December 31st Deal
Here's where it gets interesting. Let's say you sign a customer on December 31st for a 12-month contract worth €12,000.
What happens to your MRR? - You add €1,000 to your MRR immediately
What happens to your revenue? - You recognize €32.88 in revenue for December (1 day of the 365-day contract, assuming straight-line revenue recognition)
So you've added €1,000 to your MRR but only €33 to your actual revenue for the month. This is completely normal and correct.
Why This Matters
This is why looking at MRR growth is often more valuable than looking at revenue growth in the early stages of a SaaS company. MRR gives you a much clearer picture of:
- The trajectory of your business
- The value you're creating in your subscription base
- Whether your sales efforts are actually working
Revenue, especially in the early days, can be extremely lumpy and misleading.
What Counts as MRR (and What Doesn't)
Does count as MRR: - Monthly subscription fees - Annual contracts (divided by 12) - Multi-year contracts (divided by contract length, then by 12) - Recurring add-ons or usage fees that are predictable
Doesn't count as MRR: - Setup fees - One-time implementation costs - Professional services - One-off custom development - Unpredictable usage-based fees - Non-recurring add-ons - One-time credit notes or discounts (e.g., compensation for technical issues)
This last point trips people up frequently. If you issue a €500 credit note to compensate a customer for a service disruption, this doesn't affect your MRR. The underlying subscription contract hasn't changed - the customer can still be invoiced for the same amount going forward. The credit note affects your recognized revenue for that period, but your MRR remains unchanged.
Getting these calculations right manually can be tedious and error-prone. This is why Fenerum automatically calculates MRR and tracks all the components (new MRR, expansion MRR, churn MRR) for you.
The Revenue Recognition Side
While MRR is added immediately when you sign the contract, revenue recognition follows accounting rules (like Bogføringsloven or IFRS 15). For a typical annual subscription:
- Customer pays €12,000 upfront on January 1st
- You add €1,000 to your MRR
- You recognize €1,000 in revenue each month for 12 months
- Your deferred revenue decreases by €1,000 each month
This is why looking at your balance sheet is just as important as looking at your P&L in a SaaS business. That deferred revenue line tells you how much future revenue you've already "banked."
If you're doing this manually in spreadsheets, you're probably spending hours each month on these calculations. Fenerum automates revenue recognition so your accounting is always accurate and up-to-date, while giving you real-time visibility into your MRR metrics.
Common Mistakes I've Seen
Mistake 1: Including one-time fees in MRR
I've seen companies add their setup fees to MRR. Don't do this. It artificially inflates your MRR and makes your churn look terrible when those "customers" inevitably don't renew the one-time fee.
Mistake 2: Confusing bookings, billings, revenue, and MRR
- Bookings: Total contract value signed
- Billings: What you actually invoice
- Revenue: What you recognize according to accounting rules
- MRR: Monthly value of your recurring contracts
These are four different numbers, and they're all important for different reasons.
Annual vs Monthly Contracts
Here's another area where people get confused. If you have a customer paying monthly (€100/month) versus annually (€1,200/year), they both contribute the same to your MRR: €100.
But they have very different cash flow implications:
- Monthly: You get €100 in cash each month
- Annual: You get €1,200 upfront
This is why tracking both MRR and cash is critical. You can have great MRR growth but still run out of money if you're not managing cash flow properly.
Practical Example from Plecto
When we were growing Plecto, we made a strategic decision to push for annual contracts. This meant:
- Our MRR growth rate appeared similar whether customers paid monthly or annually
- Our cash position improved dramatically
- Our revenue recognition stayed spread out over 12 months
- Our churn appeared lower (because annual contracts had better retention)
But investors and board members who understood the distinction could see we were building a much more valuable business because:
- Annual contracts meant better cash flow
- Lower churn meant higher LTV (Lifetime Value)
- The predictability of revenue improved
The Bottom Line
MRR is a management metric, not an accounting one. It's designed to give you a clear, forward-looking view of your subscription business health. Revenue is what you report in your financial statements according to accounting rules.
Both are important. Both tell you different things. And mixing them up can lead to bad decisions about your business.
If you're running a SaaS company, make sure your finance team, your investors, and your board all understand the distinction. It'll save you a lot of confused conversations down the road.
Key Takeaways
- MRR = Monthly value of your recurring contracts
- Revenue = What you recognize per accounting rules
- A new contract adds to MRR immediately but revenue is recognized over time
- Only recurring elements count toward MRR
- Track both MRR and revenue - they tell different stories
- Annual contracts are your friend for cash flow, even if MRR looks the same
At Fenerum, we built our subscription billing platform specifically to handle these complexities automatically. The system calculates MRR, handles revenue recognition according to accounting standards, and gives you real-time insights into your unit economics - so you can focus on growing your business instead of wrestling with spreadsheets.
If you're building a SaaS company and want to discuss metrics, subscription models, or scaling strategies, feel free to reach out on LinkedIn.