SaaS Startup Accounting: MRR, ARR, Churn, and the Metrics That Matter
If you've founded a SaaS company, you've probably heard someone at a networking event or in a pitch meeting ask about your MRR, ARR, and churn rate. Maybe you smiled and nodded. Maybe you went home and Googled the terms. Either way, you're not alone—most SaaS founders don't come from accounting backgrounds, and the financial metrics that matter in subscription business are fundamentally different from traditional companies.
This isn't just accounting jargon. These metrics directly determine whether your startup survives, grows profitably, or burns out. They inform every decision you make: whether to hire, whether to increase spend on customer acquisition, whether you can reach profitability before your cash runs out.
In this guide, we'll walk through the essential SaaS accounting metrics every founder must track, show you exactly how to calculate them, provide real benchmarks, and explain why each one matters. By the end, you'll understand your unit economics deeply enough to make data-driven decisions about the future of your company.
Why SaaS Accounting Is Fundamentally Different
Before we dive into specific metrics, let's be clear about why SaaS accounting doesn't work like traditional software licensing, product sales, or services businesses.
In a typical software licensing deal, a customer pays $10,000 upfront. Your accountant records that $10,000 as revenue in month one. Done.
In SaaS, a customer pays you $500 per month, every month, for as long as they stay with you. Under accounting standards (ASC 606, which we'll cover), you recognize that $500 as revenue only in the month you deliver the service. The customer might cancel next month, leaving you with just $500 in revenue. Or they might stay for three years, generating $18,000 in total revenue.
This difference means:
Predictability matters more. You need to know how many customers will renew, not just how many you acquired.
Recurring patterns are everything. Month-to-month trends reveal the health of your business far better than annual revenue numbers.
Cash and accounting revenue diverge. You might have strong cash flow (upfront annual billing) but declining accounting revenue (if churn is rising).
Growth metrics change meaning. Revenue growth doesn't tell the whole story if churn is eating away at your base.
This is why SaaS companies are obsessed with metrics like MRR, churn, and CAC—they directly measure the things that make or break subscription businesses.
The Essential SaaS Metrics Every Founder Must Track
1. MRR (Monthly Recurring Revenue): Your Business's Monthly Heartbeat
Definition: Monthly Recurring Revenue is the predictable, recurring revenue your company generates each month from all active subscriptions. It excludes one-time charges, non-recurring fees, and usage-based overages (though some definitions include these—more on that below).
MRR is the single most important metric in early-stage SaaS. Why? Because it tells you, month after month, whether your business is growing, stagnant, or declining. It's a cleaner signal than annual revenue or customer count because it accounts for the fact that customers stay for different lengths of time.
Calculating MRR: The Formula
MRR = (Number of Active Customers × Average Monthly Subscription Price)
If you have multiple pricing tiers, calculate separately for each tier, then sum:
MRR = (Plan A Customers × Plan A Price) + (Plan B Customers × Plan B Price) + (Plan C Customers × Plan C Price)
Worked Example:
Let's say Median's hypothetical customer base (using the dashboard data mentioned earlier) breaks down like this:
Pro Plan Monthly: 285 customers × $100/month = $28,500
Pro Plan Annual: 36 customers × ($200/12) = $600/month
(We annualize upfront payments to get the monthly run rate)
Enterprise: 7 customers × $2,000/month = $14,000/month
Total MRR = $28,500 + $600 + $14,000 = $43,100
This means Median's monthly revenue run rate (assuming no churn, no new customers) is $43,100.
Important: Different Types of MRR
Existing MRR: Revenue from customers who were active last month and remain active this month (your recurring base).
New MRR: Revenue added from brand-new customers (not upgrades) in the current month.
Expansion MRR: Revenue increases from existing customers upgrading to higher tiers or buying add-ons.
Churned MRR: Revenue lost from cancellations.
Reactivation MRR: Revenue from customers who returned after cancelling.
Net MRR Growth:
Net MRR Change = New MRR + Expansion MRR - Churned MRR ± Reactivation MRR
If your Net MRR Change is positive, your business is growing. If it's negative, you're in decline—a critical warning sign.
Benchmarks:
Healthy early stage: 5-10% MRR growth month-over-month
Strong growth phase: 10-20% MOM growth
Mature SaaS: 2-5% MOM growth (larger bases grow slower)
Warning sign: Negative MRR growth or declining month-over-month
2. ARR (Annual Recurring Revenue): Understanding Your Annualized Run Rate
Definition: Annual Recurring Revenue is your MRR multiplied by 12. It represents the revenue you would generate in a year if current recurring subscriptions remained stable.
ARR = MRR × 12
Using our Median example:
ARR = $43,100 × 12 = $517,200
When to use MRR vs. ARR:
Use MRR when you're tracking month-to-month business health, making monthly hiring or spend decisions, and monitoring near-term trends.
Use ARR when you're talking to investors, calculating annual financial plans, and comparing your company to public SaaS benchmarks (which typically report ARR).
Note on annualization: ARR is a "run rate," not a guarantee. If every customer churns next week, your ARR becomes $0. This is why ARR alone doesn't tell the complete story—you must pair it with churn metrics.
Critical insight: Many investors use ARR growth as a primary health metric because it's easy to compare across companies. If you're targeting Series A funding, you'll definitely be asked about your ARR and ARR growth rate.
3. Churn Rate: The Silent Revenue Killer
Definition: Churn rate measures the percentage of customers (or revenue) you lose in a given period. It's the single best indicator of whether your product-market fit is real and whether your unit economics will ever work.
Churn comes in two flavors: customer churn and revenue churn.
Customer Churn Rate (Monthly):
Customer Churn Rate = (Customers Lost in Month) / (Customers at Start of Month) × 100%
Example: - Starting customers: 500 - Customers lost in month: 20 - Customer churn = (20 / 500) × 100% = 4%
Revenue Churn Rate (Monthly):
Revenue Churn Rate = (Revenue Lost from Cancellations in Month) / (Total Revenue at Start of Month) × 100%
This matters because a customer on your $99/month plan churning is different from an Enterprise customer on a $5,000/month plan churning.
Example: - Starting MRR: $43,100 - Revenue lost from cancellations: $2,000 - Revenue churn = ($2,000 / $43,100) × 100% = 4.6%
Note on expansion and negative churn:
If your customers are upgrading and expanding faster than others are churning, your revenue churn can be negative. This is the holy grail of SaaS metrics because it means your existing base is growing, not shrinking.
Example: - Starting MRR: $100,000 - Churned revenue: $5,000 - Expansion MRR (upgrades): $8,000 - Net revenue change: -$5,000 + $8,000 = +$3,000 - Net revenue churn = ($5,000 - $8,000) / $100,000 = -3% (negative churn!)
Calculating Annual Churn from Monthly Churn:
If you have a monthly churn rate of 5%, what's your annual retention?
Annual Retention Rate = (1 - Monthly Churn Rate)^12
Annual Retention Rate = (1 - 0.05)^12 = 0.95^12 = 54%
This means 46% of your customers churn in a year. That's brutal and unsustainable.
Conversely, a 3% monthly churn rate gives you:
(1 - 0.03)^12 = 0.97^12 = 71.4% annual retention
Much better, but still heavy attrition if you're not adding new customers.
Churn Benchmarks:
These benchmarks vary wildly by segment, so treat them as rough guides:
SMB SaaS (self-serve or low-touch): 5-10% monthly churn is typical
Mid-market SaaS (sales-driven): 1-3% monthly churn is healthy
Enterprise SaaS: <1% monthly churn is the norm (long sales cycles, higher switching costs)
Healthy company across all segments: 2-5% monthly churn is the target
Important: Churn is the single metric that can doom your company in the long run. Even with strong customer acquisition, if churn is too high, you'll always be running on a treadmill, adding new customers just to replace the ones you lost.
4. CAC (Customer Acquisition Cost): How Much Does a Customer Really Cost?
Definition: Customer Acquisition Cost is the total cost to acquire one new customer, including sales, marketing, and associated overhead. It's essential for understanding whether your unit economics work.
The Simple Formula:
CAC = Total Sales & Marketing Spend / New Customers Acquired
But this oversimplifies. Let's get more precise:
The Detailed CAC Calculation:
CAC = (Sales Salary + Marketing Salary + Marketing Spend + Sales Tools + Commissions) / New Customers Acquired in Period
Example:
Let's say in January, Median spent: - Marketing team salary: $15,000 - Sales team salary: $12,000 - Advertising & content spend: $8,000 - Sales tools (CRM, analytics): $2,000 - Commission on sales: $3,000
Total: $40,000
New customers acquired: 20
CAC = $40,000 / 20 = $2,000 per customer
Important distinctions:
Fully-loaded CAC includes salary, overhead, and all operating costs.
Marketing-only CAC looks at just marketing spend divided by new customers (useful for benchmarking your marketing channel efficiency).
Payback period (CAC payback) is how many months it takes to recover the CAC from that customer's contribution margin:
CAC Payback Period (months) = CAC / (Monthly Revenue per Customer - Monthly Costs to Serve)
If your CAC is $2,000 and the customer pays $500/month with $50/month marginal cost to serve (payment processing, hosting, support), then:
CAC Payback = $2,000 / ($500 - $50) = $2,000 / $450 = 4.4 months
A payback period under 12 months is generally considered healthy.
Benchmarks:
Self-serve SaaS: $0-$500 CAC (low touch, organic)
SMB SaaS: $500-$3,000 CAC
Mid-market SaaS: $3,000-$15,000+ CAC (requires sales team)
Enterprise SaaS: $15,000+ CAC (long sales cycles, high-touch)
The key question: Is your CAC reasonable relative to your LTV (below)?
5. LTV (Lifetime Value): The Value of a Customer Over Their Entire Relationship
Definition: Lifetime Value is the total profit you expect to generate from a single customer over their entire relationship with your company.
The Formula:
LTV = (Average Monthly Contribution Margin) × (Average Customer Lifetime in Months)
Where Contribution Margin = Monthly Revenue - Marginal Costs to Serve (payment processing, hosting, support, etc.)
Or more specifically:
LTV = (Average Revenue per Customer per Month) × (Gross Margin %) / (Monthly Churn Rate)
Worked Example:
Let's calculate LTV for Median's typical customer:
Average monthly revenue per customer: $150 (middle tier)
Gross margin: 75% (cloud software has high margins)
Monthly churn rate: 3%
LTV = $150 × 0.75 / 0.03 = $112.50 / 0.03 = $3,750
This customer is worth $3,750 in profit over their expected lifetime.
Alternative calculation using retention:
If you know your average customer lifetime is 33 months (the inverse of 3% monthly churn), you can also calculate:
LTV = $150 × 0.75 × 33 months = $3,712.50
(Slightly different due to rounding, but the concept is the same.)
The LTV:CAC Ratio: Your Golden Metric
The ratio of LTV to CAC tells you whether your unit economics work:
LTV:CAC Ratio = LTV / CAC
Using our example:
$3,750 / $2,000 = 1.9:1
Healthy benchmarks:
LTV:CAC of 1:1 or below: You're losing money on customers. Not sustainable.
LTV:CAC of 2:1: Acceptable, but tight margins for growth.
LTV:CAC of 3:1 or higher: Strong unit economics. You have room to spend on growth.
LTV:CAC of 5:1 or higher: Excellent unit economics. You can scale aggressively.
A 3:1 ratio is the magic number that most investors want to see before they'll fund growth-stage SaaS companies.
6. Burn Rate and Runway: How Long Until You Run Out of Cash?
Definition: Burn rate is how much cash your company spends per month. Runway is how many months your cash will last at your current burn rate.
Calculations:
Monthly Burn Rate = Monthly Operating Expenses - Monthly Recurring Revenue
(If this is negative, you're profitable—congratulations!)
Runway (months) = Current Cash Balance / Monthly Burn Rate
Example:
Median has: - Monthly operating expenses: $50,000 (salaries, servers, tools, etc.) - MRR: $43,100 - Monthly burn: $50,000 - $43,100 = $6,900/month
With $250,000 in the bank:
Runway = $250,000 / $6,900 = 36 months
That's healthy. Three years of runway gives you time to reach profitability or raise funding.
Critical distinction: Burn rate is a cash metric, not a revenue metric. You might have $100,000/month in bookings (contract revenue), but if customers pay quarterly and your expenses are due monthly, you can still run out of cash.
Runway benchmarks:
Less than 6 months: Critical. Start fundraising or cut costs immediately.
6-12 months: Concerning. You need a clear path to profitability or funding.
12-24 months: Healthy. Most companies operate in this zone.
24+ months: Comfortable. You have room to invest in growth.
Revenue Recognition for SaaS: ASC 606 Basics for Founders
You don't need to become an accountant, but understanding ASC 606 (the accounting standard for revenue recognition) is important for accurate financial reporting and talking to investors.
The Core Principle:
You recognize revenue when you satisfy your performance obligation to the customer, not when you receive payment.
For typical SaaS:
You have a subscription agreement. Your performance obligation is to provide the software/service for the contract period. Therefore, you recognize the revenue ratably over the contract period.
Example:
A customer signs a 12-month contract at $12,000 upfront and pays you immediately. Under ASC 606, you don't recognize $12,000 in revenue in month one. Instead:
Revenue recognized each month: $12,000 / 12 = $1,000/month
Month 1: Record $1,000 as revenue, $11,000 as deferred revenue (a liability)
Month 2: Record $1,000 as revenue, reduce deferred revenue to $10,000
And so on...
This is why cash flow and accounting revenue diverge in SaaS. You might have $12,000 in cash in month one, but only $1,000 in revenue.
Where complexity enters:
Multi-year contracts: Same principle—spread recognition over the contract term.
Usage-based pricing: You recognize revenue as usage is metered.
Free trials: Generally not recognized as revenue (no performance obligation satisfied).
Discounts for annual upfront: Still recognized ratably if the contract is for 12 months.
If you're raising funding or operating at scale, you'll need a proper accountant or bookkeeper to handle revenue recognition correctly. But at minimum, understand that your cash receipts and revenue numbers will likely differ.
Unit Economics Explained: Putting It All Together
Unit economics is a framework for understanding whether your business model works at the level of an individual customer.
The key variables:
Initial metrics: - CAC: $2,000 (what you spend to acquire) - ACV (Annual Contract Value): $1,800 (what the average customer pays per year) - Gross margin: 75%
Derived metrics: - Year 1 contribution margin: $1,800 × 0.75 = $1,350 - CAC payback: $2,000 / $1,350 = 1.48 years (17.8 months) - Year 2-3 contribution margin: $1,350/year (assuming they don't churn)
At a 3% monthly churn (71% annual retention), the customer stays about 33 months on average:
Gross profit over lifetime: $1,350 × 2.75 years ≈ $3,712
So your LTV is ~$3,712 and your LTV:CAC is $3,712 / $2,000 = 1.86:1.
Is this healthy?
It's in the acceptable range, but tight. The company is spending $2 to get $3.71 in gross profit—but the payback takes 18 months. If growth is the priority, this isn't enough margin. If the goal is profitability, it works, but there's no room for error (no margin for higher churn, lower ACV, or lower CAC payback).
The unit economics framework forces you to ask:
Are we acquiring customers profitably?
Are those customers staying long enough to generate value?
What happens if churn increases by 1%?
If CAC increases 20%, does LTV still justify it?
These questions matter because they inform every other decision in your company.
Building Your SaaS Financial Dashboard
Spreadsheets work for early-stage companies, but as you grow, they become error-prone and slow. A financial dashboard should show:
Monthly view: - MRR (with breakdown by plan/product) - Net MRR change (new + expansion - churn) - Customer count and growth rate - Churn rate (both customer and revenue) - CAC and payback period (if you track it monthly)
Trailing 12-month view: - ARR - LTV:CAC ratio - Gross margin - Burn rate and runway
Trends: - MRR growth rate (month-over-month and year-over-year) - Churn trend (is it improving or worsening?) - Customer acquisition trend (are you slowing down?)
By cohort: - Retention curves by signup cohort (do month-one customers stay longer than month-twelve customers?) - CAC by acquisition channel - LTV by cohort
For a company like Median's fictional dashboard, you'd show:
MRR: $43,100
ARR: $517,200
Monthly Growth: 8.5%
Customer Count: 328
Churn Rate (Monthly): 2.8%
LTV:CAC Ratio: 2.1:1
Burn Rate: $6,900/month
Runway: 36 months
This high-level view tells investors (and you) whether the business is healthy.
Common SaaS Accounting Mistakes
1. Mixing Cash and Revenue
Mistake: Celebrating the $100,000 in annual contracts you signed in month one as "month-one revenue."
Reality: Under ASC 606, you recognize that $100,000 ratably over the year—maybe $8,333/month. Your cash is up $100,000, but your revenue is only $8,333.
Fix: Separate cash metrics (MRR, burn rate) from accounting metrics (recognized revenue) in your mental model.
2. Ignoring Churn
Mistake: Focusing only on new customer acquisition and overlooking the 5% monthly churn that's quietly eating your growth.
Reality: If you acquire 50 customers at 5% churn, you're running in place after about 20 months.
Fix: Track churn weekly and make it a company-wide KPI. A 1% reduction in churn has the same impact on long-term value as a 20% increase in CAC.
3. Calculating LTV Without Churn
Mistake: Assuming customers stay forever. Calculating LTV as (ACV × 10 years) without accounting for churn.
Reality: This overstates LTV by 2-3x and makes unit economics look better than they are.
Fix: Always include churn in your LTV calculation. It's not pessimistic—it's realistic.
4. Not Separating Gross from Net Revenue
Mistake: Lumping payment processing fees, refunds, and taxes into your top-line MRR number.
Reality: These reduce your actual revenue. A $10,000 MRR with $500 in fees and refunds is really $9,500.
Fix: Calculate both gross and net MRR. Use net MRR for realistic financial planning.
5. Deferred Revenue as Revenue
Mistake: Recording annual upfront payments as immediate revenue instead of deferred revenue.
Reality: You have cash, but not revenue (yet). Treating it as revenue inflates the top line and creates audit risk.
Fix: Record upfront payments as deferred revenue (liability), then recognize ratably.
6. Ignoring Marginal Costs
Mistake: Calculating contribution margin without including customer-specific costs.
Reality: Not every dollar of revenue is profit. Payment processing (2-3%), customer support, and hosting all reduce LTV.
Fix: Include all marginal costs in your contribution margin calculation.
7. Not Adjusting CAC for Sales Cycles
Mistake: If you have a 6-month sales cycle, calculating CAC based on the same month's spend and customers acquired.
Reality: The customer acquired in month six probably resulted from sales effort that spanned months one through six.
Fix: Use a trailing 6-month average of sales and marketing spend divided by customers acquired, or attribute customer acquisition to the month they signed (not closed).
When to Upgrade from Spreadsheets to Proper Accounting
Spreadsheets are fine when: - You have <50 customers - You're on a single pricing plan - Your monthly changes are minor - You have time to manually track everything
You need to upgrade when: - You have >100 customers or multiple pricing tiers (errors become likely) - You're raising institutional funding (you'll need auditable systems) - Your co-founder or CFO is spending >5 hours/week on financial admin - You need real-time insights to make decisions - You're doing complex revenue recognition (usage-based, multi-year, etc.)
This is where tools like Median come in. Instead of a spreadsheet where you manually log revenue, categorize expenses, and calculate metrics, Median provides automatic financial bookkeeping with AI categorization, real-time dashboards showing MRR, ARR, revenue by product, and expense breakdown.
Median integrates directly with Stripe, so revenue is tracked automatically. The dashboard surfaces the metrics that matter—MRR growth, churn, burn rate—without the manual work. For a SaaS founder juggling product, sales, and operations, this automates the busywork and ensures your metrics are accurate and up-to-date.
The result: You know your unit economics at all times. You can model "if we increase CAC by $500, how does LTV need to change?" You catch problems (churn spiking, CAC rising) in real time instead of discovering them in a quarterly review.
Frequently Asked Questions
Q: Should I track MRR or ARR?
A: Both. MRR is your operational metric—use it to track month-to-month health and make weekly/monthly decisions. ARR is your strategic metric—use it for annual planning, fundraising conversations, and comparing to industry benchmarks. Most investors ask for both in a monthly dashboard.
Q: What if I have different billing periods (some customers pay monthly, some quarterly, some annually)?
A: Convert everything to a monthly equivalent in your MRR calculation. A customer paying $300/quarter = $100/month MRR. A customer paying $1,200/year = $100/month MRR. This normalized view shows your true recurring revenue run rate.
Q: How often should I recalculate LTV and CAC?
A: CAC can be calculated monthly (though it's noisier than MRR). LTV should be recalculated quarterly or as your churn rate changes. If your churn rate drops from 4% to 2%, your LTV essentially doubles—that's important to know for decision-making.
Q: Is a negative revenue churn rate possible, and how do I achieve it?
A: Yes. Negative revenue churn means your expansion (upgrades, add-ons) exceeds your churned revenue. It happens when: - You have strong expansion features (land-and-expand model) - Your customer base is maturing and expanding usage - Churn rate is already low - ASP (average selling price) increases over time
This is a competitive advantage. Companies like Slack and Dropbox have achieved negative revenue churn.
Q: If I'm not yet profitable, does unit economics matter?
A: Absolutely. Unit economics predict your path to profitability. If your LTV:CAC is 1.5:1, even at zero burn rate, you're not profitable per customer. You need to improve either CAC (more efficient acquisition) or LTV (reduce churn, increase ACV). Unit economics shape your entire strategy.
Q: How do I model growth? If MRR is $50K and growing 10% per month, when will I hit $1M ARR?
A: Use the compound growth formula:
Future MRR = Current MRR × (1 + growth rate)^months
$1,000,000 annual / 12 = ~$83,333/month MRR target
$50,000 × (1.10)^n = $83,333 (1.10)^n = 1.67 n = log(1.67) / log(1.10) = 6.3 months
At 10% monthly growth, you hit $1M ARR in about 6.3 months. Of course, growth rates change, but this math is useful for modeling.
Q: What SaaS accounting metrics matter most for Series A investors?
A: In this order: 1. MRR and MRR growth rate (month-over-month) 2. Churn rate (customer and revenue) 3. CAC and payback period 4. Burn rate and runway 5. LTV:CAC ratio 6. Gross margin
If you can show strong MRR growth (15%+ month-over-month), sub-5% monthly churn, and a LTV:CAC of 3:1+, you're in a strong position for fundraising.
Conclusion: Your Financial Foundation
SaaS accounting is different because SaaS businesses are different. You're not selling a product one time—you're building recurring revenue relationships. That changes how you measure success, how you allocate resources, and how you determine whether your business will survive long-term.
The metrics we've covered—MRR, ARR, churn, CAC, LTV, and burn rate—are not optional complexity. They're the language you use to understand your business deeply. Founders who obsess over unit economics make better decisions faster. They know exactly how much they can afford to spend on customer acquisition. They catch problems (churn spikes, increasing CAC) before they threaten runway. They model scenarios ("if we increase customer success headcount, can we drop churn by 1%?") instead of guessing.
Start with a spreadsheet if you're early. But as you grow, invest in a system that automates financial bookkeeping and surfaces these metrics in real time. Median does exactly that—AI-powered categorization, automatic Stripe integration, and dashboards that show your MRR, ARR, revenue by product, and expenses at a glance. When these numbers update in real time instead of being calculated monthly in a spreadsheet, you see patterns and opportunities faster.
The goal isn't to become an accountant. The goal is to understand your unit economics well enough to make decisions with confidence. And that starts with tracking and understanding the metrics that matter.
Ready to automate your SaaS accounting? Median gives founders real-time visibility into MRR, ARR, churn, and unit economics. Get started with Median and let us handle the bookkeeping while you focus on building.