📉 CARR → ARR → Cash → Revenue
Why definitions matter: how I break down CARR vs ARR to keep SaaS metrics honest and tied to real cash flow.
As the first finance hire in an early-stage SaaS startup, one of the first metrics to check is how the company defines ARR: Annual Recurring Revenue. It’s the foundation for everything else you steer the company with (CAC ratios, burn ratios, etc.) and the first number investors will scrutinize. You’ll often discover that many companies actually report Committed ARR (CARR) instead of true ARR. So what’s the difference - and does it matter?
Short answer: yes, it matters a lot. Not just for cleaner spreadsheets, but for how to interpret your growth, investments and cash flow.
🚧 Note: there’s a lot of discussion around “is ARR dead” as a lot of AI solutions are moving towards usage/consumption and outcome based pricing. I won’t go into that discussion at this point, but be aware that this post is mainly for traditional subscription based SaaS companies.
🤔 First, consider what you use ARR for
Your ARR numbers (or MRR if you bill monthly) isn’t meant to impress - it’s mean to be a simple, reliable baseline for understanding your recurring revenue run-rate. When defined properly, it helps answer questions like:
What is the true recurring cash flow of the business?
Is the GTM investment paying off (LTV:CAC) and how long does it take to recover (CAC Payback)?
Are we building an efficient sustainable business? (Net burn, ARR per FTE / $ payroll)
ARR is one of those few metrics that is both backwards-looking (confirms what we’ve sold & billed), and forward looking (implies how much cash we expect to generate).
CARR vs. ARR - timing matters, but so does discipline
It’s easy to confuse the two, especially as some definitions of CARR include future step-ups (could be multi-year contracts with incremental commitments).
In theory, the difference is relatively simple and should mostly be a matter of timing:
CARR = what you contractually closed, regardless of whether you’ve billed it yet
ARR = what’s actually live in the system and invoiced
My default is always to use ARR for core reporting - board decks, investor updates and QBRs. It’s a closer proxy to cash flow, which is what investors want to understand. They’ll also run their own due diligence to verify it bridges to your accounting revenue (GAAP/IFRS).
In addition, there’s been a lot of abuse of CARR (especially when companies just call it ARR) to overstate momentum and growth; think booking deals long before contracts start (3+ months out), or inflating commitments that never turn into cash (your customer might have signed a contract committing to incremental spend in year 2 and year 3 - but it’s so far out that it very well could change, and signed contracts are not a guarantee that a company will pay).
❓ So why use CARR?
When navigating high-growth environments, optimizing for immediate cash flow might not always be the right thing (bet you didn’t expect a CFO to say that!). But reasoning here is that you want to optimize parts of the organisation - mainly Sales and Marketing - for momentum.
CARR makes sense as an internal metric for Sales-led organisations, where the driver is closing the revenue. Your job as the finance lead then becomes even more important, because you need to monitor and track the CARR → ARR → Cash bridge closely, to ensure liquidity and cash flows during the scaling phase.
⚖️ Consistency is key - and always bridge to Cash & Revenue
Your definitions should always follow the logic of the business, and eventually bridge to cash flow and revenue. If you’re finding large gaps between CARR and ARR, you likely have some GTM challenges to solve (i.e. selling large future promises).
Likewise, if your actual ARR doesn’t bridge to your cash flow and revenue recognition, you’ll have a hard time using ARR as a metric to steer the business because you’re simply not optimizing for cash flow.
⚠️ A caution on recognizing discounts & step-ups
One classic trap is handling discounts and multi-year step-ups.
Should you book the discounted first year, or the higher future renewal price as ARR?
Do you include step-ups in years 2 and 3 of a multi-year contract if the customer commits, even though the ARR isn’t realized yet?
There’s no single right answer to this, but pick what best represents your true recurring cash flow and be transparent about it.
Examples of different discount recognition methodologies:
In one case we had smaller ACVs and 95%+ GRR. Customers auto-renewed at list price with no pushback, and our one-time discounts represented < 5% of new ARR, so we opted for showing ARR including discounts, but then transparently showing them in the P&L.
For another case the deals had larger ACVs and deep discounts to incentivize urgency in getting customers to sign up for a new product. Combined with the lack of renewal history, the choice here was to take a more conservative approach and only recognize ARR net of discounts; but then record the incremental ARR as NRR at renewal.
The key takeaway is to make a choice based on what you’re optimizing for, and how you’re planning to use your metrics to drive behaviour.
Example: Customer signs a 12-months contract on January 15th. The subscription starts on February 1st, and they pay for the full year up front. Your standard payment terms are net 30.
To incentivize them to sign, the Sales rep gives them a $20 discount the first year.
🎓 Takeaways on ARR
Remember, your job as a CFO is not to find the biggest number (though you might get some push from the CEO/Founders in that direction 🤣), it’s to find the right metric for the job.
Most often, that’s the metric closest to real, recurring cash flow - and you have to build trust around that, especially with your board and investors.
When in doubt, consider your audience:
Sales need to measure momentum → CARR is fine, but keep it tight and avoid “promises”.
Boards, lenders, and your future self care about what hits the bank → that’s where clean ARR is the best proxy for cash flow and revenue.
If they don’t align - fix the root cause, not just the slide.
👉 What’s your approach? Do you handle discounts or multi-year deals differently? Hit reply or comment, I’d love to hear how others keep ARR honest.