MRR is computed by dividing the contract amount by the duration of the contract computed in months.
MRR = contract amount / duration
ARR is computed by multiplying MRR by 12
ARR = 12 * MRR
Flowrev implements multiple allocation methods which impacts the allocation of the computed MRR/ARR to a partial starting and a partial ending month in the contract's service period.
- Allot $0 to a partial ending month [System default]
- Allot prorated MRR to partial starting month, partial ending month
- Allot $0 to a partial starting month
1. Allot $0 to a partial ending month
Every month spanned by the service period of the contract is allotted the MRR/ARR computed except a partial ending month is allotted $0.
The operation of this method, which is the system default, is best illustrated with some examples. Consider the following scenarios:
$1,200 contract with a service period of Jan 16, 2020 - Jan 15, 2021
The duration of the contract is 12 months (= 16/31 + 11 + 15/31). The system will compute and allocate MRR = $100 (contract amount / 12) each month Jan to Dec 2020. And allocate $0 to Jan 2021. With this setup, an ending partial month is allotted $0.
ARR (= 12 * MRR) from this contract will be $1,200 each month Jan to Dec 2020.
$1,148.39 contract with a service period of Jan 1, 2020 - Dec 15, 2020
The duration of the contract is 11.4839 ( 11 + 15/31). The system will allot MRR = $100 (contract amount / 11.4839) to each month Jan to Nov 2020. It will allot $0 to the partial ending month Dec 2020
ARR (= 12 * MRR) from this contract will be $1,200 each month Jan to Nov 2020.
$1,151.61 contract with a service period of Jan 16, 2020 - Dec 31, 2020
The duration of the contract is 11.5161 (11 + 16/31). The system will allot MRR = $100 (contract amount / 11.5161) to each month Jan to Dec 2020. A partial starting month is allotted the computed MRR.
ARR (= 12 * MRR) from this contract will be $1,200 each month Jan to Dec 2020.
$100 contract with a service period of Mar 21, 2020 - Apr 20, 2020
The duration of the contract will be computed to be 1.0215 (11/31 + 20/30), but is adjusted to be 1 month to reflect the intent of setting the contract ending day (20th) in the partial ending month to be a day before the starting day (21st) in the starting month. The system will compute MRR = $100 (contract amount / 1) and allot $100 to Mar 2020. And allot $0 to Apr 2020.
ARR (= 12 * MRR) allocated from this contract will be $1,200 in Mar 2020. And $0 in Apr 2020.
Note: with this allocation method:
- full credit is extended in a starting partial month for the entire amount of MRR "won" even if on the last day of the month
- a renewal, i.e. the service starting date on the renewal transaction when set to be in the ending partial month of the preceding contract, will smooth out the MRR in that partial month because the computed MRR amount is allocated in full in the renewal contract's partial starting month
- unless renewed in the month, a loss for the entire amount of MRR (and correspondingly ARR) is taken for a terminating contract in the partial ending month even if the contract ends on the first day of the month
Note: the Extend flag can be used to temporarily fill in the MRR/ARR in a partial ending month too. It should be cleared once the renewal invoice has been raised to prevent overstating MRR/ARR in that month.
2. Allot prorated MRR to partial starting month, partial ending month
Every month spanned by the service period is allotted the computed MRR/ARR except the allocation is prorated for a partial starting month, and/or for a partial ending month.
For the following scenarios:
$1,200 contract with a service period of Jan 16, 2020 - Jan 15, 2021
The duration of the contract is 12 months, with a month split between Jan 2020 (16/31) and Jan 2021 (15/31). The system will allot MRR = $100 (contract amount / 12) each month Feb to Dec 2020, allot $51.61 ($100*16/31) in Jan 2020, and 48.39 ($100*15/31) in Jan 2021.
ARR (= 12 * MRR) from this contract will be $1,200 each month Feb to Dec 2020. ARR = $619.35 (12 * $51.61) in Jan 2020. ARR = $580.65 (12 * $48.38) in Jan 2021
$1,148.39 contract with a service period of Jan 1, 2020 - Dec 15, 2020
The duration of the contract is 11.4839 (11 + 15/31) months. The system will allot MRR = $100 (contract amount / 11.4839) each month Jan 2020 to Nov 2020. And it will allot 100*15/31 = $48.39 in Dec 2020.
ARR (= 12 * MRR) from this contract will be $1,200 each month Jan to Nov 2020. ARR = $580.68 (12 * $48.39) in Dec 2020
$1,151.61 contract with a service period of Jan 16, 2020 - Dec 31, 2020
The duration of the contract is 11.5161 (11 + 16/31) months. The system will allot MRR = $100 (contract amount / 11.5161) each month Feb 2020 to Dec 2020. And $51.61 ($100 * 16/31) to Jan 2020.
ARR (= 12 * MRR) from this contract will be $1,200 each month Feb to Dec 2020. ARR = $619.35 (12 * $51.61) in Jan 2020
$100 contract with a service period of Mar 21, 2020 - Apr 20, 2020
The duration of the contract will be computed to be 1.0215 (11/31 + 20/30), but is adjusted to be 1 month to reflect the intent of setting the contract ending day (20th) in the partial ending month to be a day before the starting day (21st) in the starting month. The system will compute MRR = $100 (contract amount / 1) and allot $35.48 to Mar 2020. And $64.52 to Apr 2020.
ARR (= 12 * MRR) allocated from this contract will be $425.76 in Mar 2020. And $774.24 in Apr 2020.
- a partial credit is extended in a partial starting month for the MRR won if the contract starts any day other than the first day of the starting month
- a renewal, i.e. the service starting date on the renewal transaction when set to be in the ending partial month of the preceding contract and starting a day after the prior contract ends, will smooth out the MRR in that partial month. The total amount in the month will include a prorated amount from the terminating contract and a prorated amount from the renewal contract adding to the MRR, and correspondingly to ARR.
- unless renewed in the month, a loss for a prorated amount of the MRR is taken for a terminating contract if the contract ends on any day prior to the last day of the ending month
3. Allot $0 to a partial starting month
Every month spanned by the service period is allotted the MRR/ARR computed except a partial starting month is allotted $0.
This is akin to the default method 1, detailed above. But any time the starting month is partial, $0 will be allocated to it. All other months in the service period will get the computed MRR/ARR amount including an ending partial month.