Defining your ARR

• By
• Chris Burgner

  Chris Burgner

  12+ years of experience, most recently as a Director of Finance at Intercom.

  

In most SaaS companies, when you reach a certain scale, Finance has its own forecast, and Sales (or Sales Ops) tend to have their own. Your goal should be to align these two groups as closely as possible. Sales and Finance should walk into every forecast review with a tightly aligned view of the state of the business. It took us many iterations (and horrific meetings) to get there at Intercom.

There were many times over the first few months of that relationship when we’d walk into a Go-to-Market forecast review, and Sales would be calling a number millions off from what we were calling in Finance. We looked like buffoons.

This would happen for a variety of reasons. Sometimes, it was because the contract signed date in Salesforce differed from the invoice date. Other times, it would be because a customer would expand, and Sales would count that, but they’d miss the subsequent contraction event. Another time, a customer might sign a contract but not pay after three months. Finance would count that as a churn, but Sales wouldn’t.

We spent months and months reconciling these differences, mainly after the fact, after the painful meeting, and after the embarrassing show of ineptitude in front of the rest of the team.

This chapter is intended to help you not look like the buffoons we did.

As painful as it is to relive, Bobby’s story clarifies that having a single source of truth for ARR is critical to getting alignment across your business. How can you expect to take action and move the company forward if you can’t agree on where you are?

We’ll start by breaking down all the business considerations you need to work through to develop your own source of truth for ARR reporting. While it may seem overwhelming at first, planning this out ahead of time will save countless hours and many arguments debates down the line.

In short, we’ll cover the following topics and include recommendations and examples for each:

• Defining a customer
• Backing out discounts
• Reporting on service vs. product-based charges
• Treatment of overages (spend in excess of the contract amount)
• Building off Subscriptions or Invoices