Contracted MRR vs P&L MRR | SaaS Metrics School | MRR
Welcome back to another edition of SaaS Metrics School with Ben Murray, where we dive deep into the critical metrics that drive SaaS businesses forward. Today, we’re tackling a topic that often causes confusion for founders, finance teams, and accountants alike: the difference between Contracted MRR (Monthly Recurring Revenue) and P&L MRR.
Why Discuss Contracted MRR vs. P&L MRR?
This topic came about after I received an email from a founder of a finance/accounting software platform. They mentioned that many accountants and finance professionals were curious about why the MRR number they see on their bookings report differs from what’s reflected on the P&L (Profit and Loss Statement). This raised an important question: What exactly is causing these discrepancies?
Let’s start by understanding the various meanings of MRR. MRR is typically understood as Monthly Recurring Revenue, but this can come from different sources, leading to variations in the numbers you see. You could have:
Contracted MRR: The recurring revenue based on customer contracts.
P&L MRR: The recognized revenue reported on your P&L after applying revenue recognition principles.
What is P&L MRR?
When we talk about P&L MRR, we're referring to the subscription revenue recognized on the profit and loss statement. This is where revenue recognition plays a crucial role. If you invoice customers annually, you don't recognize all that revenue at once. Instead, you amortize it over the contract duration—this might mean monthly or daily amounts depending on how you recognize revenue.
For example, if a customer signs up mid-month, the MRR recognized on the P&L will be prorated for that specific month. So, if a new contract starts on the 15th of the month, you may only recognize half a month of revenue for that subscription.
The key takeaway is that the P&L MRR reflects the actual revenue recognized after considering the timing and method of recognition, which may differ from what’s been contracted or invoiced.
Understanding Contracted MRR
Now, let's contrast that with Contracted MRR. This is the committed recurring revenue based on your customer contracts. For example, if you have 100 customers each paying $50 per month, your Contracted MRR would be $5,000 for that month.
However, when you look at your P&L MRR, the number might be lower. Why? Several factors can cause this discrepancy:
1. Prorated Revenue: If you signed five customers in the middle or end of the month, your P&L won’t reflect the full month’s revenue for those customers. Instead, it will only account for the days they were active.
2. Revenue Recognition Method: Depending on how you're recognizing revenue, it may be on a daily basis or at the end of the month. This can cause temporary differences between the Contracted MRR and P&L MRR.
Aligning Contracted MRR with P&L MRR
In a perfect world, Contracted MRR and P&L MRR should align, but due to revenue recognition rules and proration, this alignment might only happen after a full month of subscription revenue has been recognized. This is why it’s essential to understand which MRR metric you're looking at:
Is it invoiced MRR?
Is it Contracted MRR?
Or is it RevRec MRR (revenue-recognized MRR)?
Each of these can differ depending on how you’re measuring the revenue.
Why the Differences Matter
Understanding the difference between these types of MRR is critical because it affects how you report your company’s financial health. Whether you're a founder trying to make sense of your dashboards or an accountant looking at the P&L, you need to be clear about which MRR you're referring to.
Financial Reporting Accuracy: Accurate tracking of MRR types ensures your financial statements reflect the true state of your recurring revenue.
Decision-Making: Founders and finance teams need to rely on the correct MRR figures when making strategic decisions around growth, profitability, and forecasting.
Investor Relations: Investors may expect to see a clear distinction between Contracted MRR and what’s reported on the P&L. Providing clarity on these differences can build trust and ensure accurate reporting.
Thanks for tuning in to this episode of SaaS Metrics School. If you found this lesson helpful, make sure to like, comment, and subscribe for more insights into SaaS financial metrics. Stay tuned for more content to help you better understand your SaaS business’s financials, and don’t forget to share your questions in the comments. I’m always happy to answer and provide further explanations!
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