Separate contract run-rate, recognised revenue and cash
MRR and ARR are management measures. They do not replace revenue, contract assets and liabilities or cash flow in the financial statements. Publish your metric definitions, including the measurement date, recurring charges, discounts, foreign exchange treatment, usage and when a new contract becomes active.
Under Ind AS 115, where applicable, recognise revenue as performance obligations are satisfied. A customer prepayment can create a contract liability while service remains to be delivered. Incremental costs of obtaining a contract, such as a commission that would not arise without that contract, are recognised as an asset if expected to be recovered, subject to the practical expedient if the amortisation period would be one year or less. Ordinary selling expenses incurred regardless of success are generally expensed unless separately eligible for recognition. Assess fulfilment costs under the relevant requirements rather than assuming every onboarding expense is immediately expensed.
Define the management dashboard
| Metric | Working definition | Watch for |
|---|---|---|
| MRR and ARR | Monthly normalised active recurring subscription charges; ARR is 12 times MRR under this policy. | Exclude one-time services from the recurring metric. Show committed, future-start and usage run-rates separately or define them explicitly. |
| CAC | Acquisition-related sales and marketing spend ÷ matched new customers. | Use matched cohorts or a consistent lag. Costs belong in the numerator; separate acquisition from retention and expansion. |
| Gross-profit LTV | Periodic average revenue per account × gross margin ÷ logo churn for the same period. | A simplified model assuming steady margin and churn. Near-zero churn makes the result unstable; compare with cohort cash flows and use sensitivity ranges. |
| Payback | CAC ÷ gross profit per account per month. | A gross-profit measure. Actual cash payback depends on collection and spending dates. |
| GRR | Opening cohort recurring revenue less contraction and churn, divided by opening cohort recurring revenue. | Excludes expansion. Under this definition GRR does not exceed 100%. |
| NRR | End recurring revenue of the opening cohort ÷ its opening recurring revenue. | Includes changes for the same cohort; excludes new accounts and applies a documented reactivation policy. |
Reconcile ending MRR to beginning MRR plus new, expansion and reactivation MRR, less contraction and churn. Assign each movement once. For an unchanged ₹50 lakh MRR with ₹15 lakh of new subscriptions and ₹15 lakh of opening cohort cancellations, headline growth is zero but, absent other movements, opening cohort NRR is 70%. Review monthly movements and cohort outcomes together. Target ranges are internal choices, not accounting standards.
Seven worked cases
1. New sales conceal contraction in the opening cohort
Opening ARR is ₹12 crore. Eighty new accounts at an average annual recurring contract value of ₹12 lakh add ₹9.60 crore; existing account expansion adds ₹0.84 crore, contraction removes ₹0.36 crore and 44 opening accounts churn, removing ₹5.28 crore. Assume these movements reconcile by cohort and the new accounts remain in the closing run-rate. Closing ARR is ₹16.80 crore (40% growth), equivalent to ₹1.40 crore MRR. The original 100 accounts retain ₹7.20 crore of ARR: NRR is 60%, GRR 53%, and logo churn 44%.
Acquisition spend of ₹6.24 crore gives CAC of ₹7.80 lakh. At ₹12 lakh annual revenue and 75% gross margin, gross profit is ₹9 lakh a year, or ₹75,000 per month; payback is 10.4 months. If the new cohort has the same stable annual churn, the simplified lifetime is about 2.27 years and LTV is ₹20.45 lakh, or 2.62 times CAC. Compare the assumption with observed lifetimes and inspect the ₹4.20 crore cash decline separately. Investigate onboarding and renewals before deciding whether to move acquisition funds into customer success or offer prepaid contracts.
2. Compare single-location and chain customers
| Metric | Starter | Multi-outlet |
|---|---|---|
| Monthly price per account | ₹1,499 | ₹18,500 |
| Gross margin and monthly gross profit | 62%; ₹929.38 | 82%; ₹15,170 |
| Monthly logo churn | 6.8% | 0.9% |
| Approximate lifetime | 14.71 months | 111.11 months |
| CAC | ₹14,500 | ₹68,000 |
| Gross-profit LTV | ₹13,667.35 | ₹16,85,555.56 |
| LTV to CAC | 0.94 | 24.79 |
| Payback | 15.60 months | 4.48 months |
Assume 350 starter and 12 chain additions per month. The starter estimate falls below acquisition cost under these assumptions; the chain estimate depends heavily on extrapolating very low churn. Test contract renewals, implementation workload and how acquisition spend changes with scale before shifting the budget or increasing prices.
3. Model prepaid institutional subscriptions
Sixty institutions at ₹8 lakh each start with ₹4.80 crore ARR. If matching annual credit revenue is ₹4.80 crore, ₹1.95 crore of receivables implies about 148.28 days DSO. If fully funded with a constant overdraft at 12%, illustrative annual interest is ₹23.40 lakh.
A 12% discount makes the annual fee ₹7.04 lakh. Forty-two institutions prepay three years at ₹21.12 lakh each, contributing ₹8.8704 crore. Eighteen prepay one year at ₹7.04 lakh, contributing ₹1.2672 crore. Total immediate receipts are ₹10.1376 crore, before tax or fees. Assuming uniform service and no financing adjustment for this arithmetic, first-year service revenue is ₹4.2240 crore; each of years two and three has ₹2.9568 crore from the three-year prepaid cohort before new payments or renewals. Record cash received before performance as a contract liability and release it as service is provided. Assess any significant financing component, especially for multi-year advances; a one-year practical expedient is conditional. A cash receipt is not a profit or evidence that the overdraft was fully repaid.
4. Separate base subscriptions from usage charges
An API customer’s old fee was ₹50,000 per month and service cost was ₹42,000, leaving ₹8,000 gross contribution (16%). The new charge is ₹25,000 including 10,000 calls, plus ₹1.80 per additional call. For 280,000 calls the charge is ₹5,11,000. At unchanged cost, gross contribution is ₹4,69,000 (91.78%). Under a base-only MRR policy, this account contributes ₹25,000 of subscription MRR and ₹4,86,000 of usage billing for the month. Report usage run-rate separately unless a defined metric includes it consistently. If a like-for-like cohort measure rises by 48%, NRR on that same measure is 148%; it does not demonstrate a change in valuation multiples.
5. Align sales commissions with implementation and retention
A 15% commission on ₹10 lakh total contract value is ₹1.50 lakh. Illustrative 30% signing, 30% successful onboarding and collection, and 40% retention milestones split it into ₹45,000, ₹45,000 and ₹60,000. Check the enforceability of vesting and clawback terms and assess the accounting based on the actual conditions. A 74% relative improvement from a 38% early churn rate would bring the rate to 9.88%; compare equally aged cohorts and isolate other changes before attributing improvement to compensation.
6. Avoid double annualising sales efficiency
Quarter-end ARR rises from ₹20 crore to ₹22.40 crore against prior-quarter acquisition spend of ₹1.80 crore. The ARR change is already annualised, so the defined ARR-based efficiency ratio is ₹2.40 crore ÷ ₹1.80 crore = 1.33, not 5.33. An alternative revenue-based Magic Number annualises the change in comparable quarterly recurring revenue once, then divides by prior-quarter sales and marketing spend. Do not interchange quarter-end ARR and recognised quarterly revenue without reconciliation.
For a Rule of 40 version using year-over-year ARR growth plus free cash flow margin, 45% growth and 8.5% free cash flow margin give 53.5 percentage points. Use a defined cash measure, such as operating cash flow less capital expenditure divided by recognised revenue. EBITDA margin less capex margin alone does not establish free cash flow margin. These measures are comparative screens, not funding commitments.
7. Separate annual NRR from retention since cohort inception
Track the original 100 logos. Assume expansion and churn/contraction are period movements and there are no new logos or reactivations in this cohort.
| Year | Active logos | Expansion (₹ lakh) | Churn and contraction (₹ lakh) | End ARR (₹ lakh) | ARR vs first year | Year-on-year NRR |
|---|---|---|---|---|---|---|
| 2021 | 100 | — | — | 100 | 100% | — |
| 2022 | 88 | 32 | 12 | 120 | 120% | 120.00% |
| 2023 | 81 | 45 | 21 | 144 | 144% | 120.00% |
| 2024 | 76 | 58 | 30 | 172 | 172% | 119.44% |
At the end of 2024, 76% of original logos remain and their combined ARR is 72% above the original cohort’s starting ARR. That cumulative expansion is distinct from annual NRR and can coexist with substantial logo losses.
Practical reporting checks
- Track one-time setup and migration charges separately from MRR. Under Ind AS 115, assess whether those activities transfer a distinct promised service; an upfront fee that does not transfer a good or service is generally recognised as the relevant future services are provided.
- For cross-border services, do not infer GST export status from a foreign invoice. Check the IGST Act conditions, place of supply and transaction facts before applying zero rating. For inbound cloud services, assess classification, supplier and recipient status, the collection mechanism and any withholding or treaty analysis separately. Model irrecoverable taxes and timing of recoverable amounts rather than assuming a universal margin deduction.
- For runway, divide available cash by representative monthly net cash burn only when that burn is positive and meaningful. Reconcile prepaid receipts, deferred service costs, debt maturities and seasonality using a cash forecast.
- Reconcile billing, payments and accounting data at month end. Keep source definitions for customer identifiers, FX and billing status. Confirm actual connector features before planning automated data feeds.