Welcome to Edition 2 of The KAT Edge.
Last edition we talked about why Bookings, Billing, and Revenue are not the same thing; and what happens when leadership treats them as if they are. If you missed it, it is worth your time.
This edition we go one level up: CARR. Contracted Annual Recurring Revenue. It is on every board deck. Most companies cannot reconcile it. Here is what to watch for.
Let's get into it.
CARR is on every board deck. Ask how it was calculated and the room goes quiet.
Contracted Annual Recurring Revenue. Four words that carry enormous weight in SaaS boardrooms, investor updates, and M&A due diligence conversations.
Most companies report it with confidence. Few can reconcile it.
That gap is not a minor administrative issue. It is a credibility risk, a valuation risk, and in some cases, a compliance risk. And it starts with a deceptively simple question nobody asks out loud: where exactly does this number come from?
What CARR actually is.
CARR is the annualized value of all active and committed contracts at a point in time. It includes signed contracts that have not yet started delivering revenue. It excludes contracts that have churned, expired, or been recontracted at a lower value.
It is a forward-looking metric. It answers the question: if nothing changes from today, what is the annualized run rate of our committed contractual base?
That distinction matters. CARR is not what you earned. It is not what you billed. It is not what you collected. It is what you are contractually entitled to assuming full delivery, no churn, and no amendments.
Three assumptions that are almost never all true at the same time.
How it differs from the metrics it is often confused with.
The critical distinction between ARR and CARR: ARR reflects what is active and delivering today. CARR includes what is signed but not yet live. In a business with long implementation cycles, significant professional services, or phased rollouts, the gap between ARR and CARR can be substantial and telling.
That gap is your implementation backlog, expressed as an annualized number. If it is growing, your sales team is outpacing your delivery capacity. If it is shrinking, you are burning through backlog faster than you are signing new business. Both matter.
Why reconciliation breaks down.
CARR sounds clean in theory. In practice it pulls data from at least three systems that were never designed to talk to each other cleanly.
The contract lives in your CRM or CLM. The billing schedule lives in your ERP or billing system. The revenue recognition schedule lives in your revenue management module or a spreadsheet. And the amendments, upgrades, downgrades, and early terminations live wherever someone remembered to record them.
When CARR is calculated manually, and it usually is, the common breaks are:
Amendments not reflected. A contract was upsold in month four but the CARR calculation still uses the original TCV. CARR is overstated.
Churned contracts not removed. A customer did not renew but the contract was not marked inactive in the source system. CARR is overstated.
Recontracted deals double-counted. The original contract and the replacement contract both appear in the calculation. CARR is significantly overstated.
Currency and proration errors. Multi-year, multi-currency contracts annualized incorrectly. CARR is wrong in ways that are difficult to detect without going line by line.
Each of these breaks individually is manageable. All of them together, in a company reporting CARR to a board or an investor, is a material problem.
What to watch for.
If your company reports CARR, ask these four questions:
What is the source system of record for CARR and who owns it?
How are amendments, churns, and recontracted deals captured and when?
What is the reconciliation between CARR and ARR and what explains the gap?
When was the last time CARR was independently verified against executed contract documents?
If any of those questions produces hesitation, a long explanation, or a reference to a spreadsheet someone built eighteen months ago -- you have found your risk.
CARR is only as reliable as the data and discipline behind it.
Boards trust it. Investors value companies on it. Acquirers stress-test it in due diligence.
The finance teams that own it need to be able to defend every line.
If you cannot reconcile it, you cannot defend it. And if you cannot defend it, it is not a metric. It is a story.
Originally published on LinkedIn.