Understanding MRR vs. Recognized Revenue: A Guide for Startups

Oct 11, 2023


If you’re running a subscription-based business, you’ve probably already started exploring ways to measure your recurring revenue. When you track your recurring revenue with a metric like monthly recurring revenue (MRR), you get a way to keep a finger on the pulse of your startup. 

Since MRR feels like such a key measuring stick, you might not think you need alternative revenue-tracking metrics. But you do. In addition to MRR, you also need to track recognized revenue.

What’s the difference? And why should your team care? You’re in the right place to find out. Before we dive into the differences, though, let’s recap MRR. 


The basics of MRR

As you can probably guess from the name, your monthly recurring revenue totals up all of the revenue that you can expect to recur month after month (e.g., from subscriptions or contracts). Say you’re a SaaS company with 15 customers each paying $100 a month. Your MRR is $1,500 (15 * $100). 

This is a super-useful measuring tool in the startup world, especially since many early-stage companies operate at a loss. By tracking MRR, you can see if you’re growing — or at least stable. Fortunately, calculating MRR isn’t hard. You just need to add up anything you charge your customers for on a recurring basis. That means accounting for:

  • Monthly or annual subscription fees (divide annual fees by 12 to get the amount you should add to your MRR) 
  • Monthly or annual contracts that renew (same rule applies: divide by 12 for annual contracts)
  • Add-ons you charge for on a monthly or annual basis (e.g., extra seats, added features)

To keep your MRR accurate, make sure you have a system in place for tracking upgrades, downgrades, discounts, and churn. 

Long story short, keeping tabs on your MRR isn’t rocket science, but it does require some work. Once you get it figured out, you can’t stop there, though. You also need to track recognized revenue — and that’s a whole different ball game. 


MRR isn’t recognized revenue

Why not? If you’re a subscription-based business, it might feel like those two are one and the same. But there are two big reasons why you need to monitor your recognized revenue separately from your MRR.

The first is that MRR doesn’t account for every potential revenue stream. It doesn’t factor in one-time costs customers pay for, like set-up fees or technical support charges. 

Secondly, and more importantly, MRR might help you keep tabs on changes in your company’s revenue, but it’s not technically recognized revenue. Revenue recognition is a separate beast, and one that requires you to adhere to generally accepted accounting principles (GAAP). 

You need to figure out this separate revenue tracking because that’s what you’ll report in key financial reports like income statements. Your investors usually won’t accept MRR alone. They’ll want to see a full breakdown of your recognized revenue. 

In the SaaS world, this can get a little tricky when your company operates on a subscription-based model. But once you get the hang of it, having a revenue recognition process in place goes a long way toward helping your startup succeed. With it, you get a more detailed way to measure your company’s performance — and prove your successes. 


Revenue recognition: when something counts

So, let’s talk revenue recognition. It can be pretty simple if you use a cash basis. That means that you record revenue on your books when the money from the customer hits your bank account. 

For most subscription-based startups, though, that doesn’t make a lot of sense. Instead, SaaS companies usually use the accrual method. With this type of revenue recognition, you record the money on your books when it’s earned, not when you have the cash in hand. Fortunately, GAAP steps in here to provide a framework for how this should work.

To give you a super simple example of accrual-based accounting, let’s say one of your customers signs up for your $100/month service, but they opt into a yearlong contract and pay upfront. That would mean you get $1,200 from them in one lump sum.  

With accrual-based accounting, you record $100 a month of revenue from the customer over the course of that year. (With cash-based accounting, you would record the full $1,200 in the month it was paid, which can skew your books and projections). 

But wait, you might be thinking, this sounds a whole lot like MRR. And so far, you’re right. But let’s say that customer also opted to pay for a $200 set-up fee so your team could integrate your solution into their tech stack. 

The MRR for them will still be $100. But in the month they sign up and pay that $200, your books should recognize $300 of revenue from that customer. 


Using MRR and recognized revenue at your startup

Yes, tracking both your MRR and your recognized revenue requires some effort from your startup. But these two metrics do a lot for you.

With MRR, you can keep a finger on the pulse of changes in your revenue trajectory. This helps you see what’s working and what isn’t. If you have a quarter where your MRR drops, you get flagged to dig in. You might find that several customers downgraded, leading you to learn that a certain feature you’re offering isn’t really needed. You can fine-tune from there. 

Investors will want to see your MRR, but they’re going to care a lot more about recognized revenue. When you have GAAP-adherent books that clearly show your revenue using the accrual method, you give them (and your own team) clarity into how, when, and from where money is coming into your startup. 

Tracking MRR and keeping up with accrual-based accounting might all sound like a lot of work, but we’re here to help with precisely this. As startup-focused CPAs who offer bookkeeping services, our team can do the heavy lifting to keep your books updated. That way, you get an accurate reflection of your MRR and recognized revenue. With those key financial metrics, you have the info you need to steer the ship in the right direction. Sound good? Get in touch.