Who it's for: finance team members who build or check the monthly ARR bridge (sometimes called the ARR waterfall or ARR roll-forward) for a SaaS business.
What you'll get: the standard bridge layout, clear rules for classifying each movement (and where companies differ), a step-by-step monthly build, a customer-level worked example for MonthEndClub Co Ltd and AI prompts you can copy.
Reading time: about 11 minutes. Shorter than explaining a bridge that doesn't add up.
Why the ARR bridge matters
A single ARR number tells you where you are. The bridge tells you how you got there: how much came from new customers, how much from existing customers buying more, and how much walked out of the door. Boards and investors read the bridge more closely than almost any other page in the pack, so it needs to add up, tie to a customer list and use the same rules every month.
Key terms
- ARR (annual recurring revenue): the annualised value of live recurring contracts at a date. Commonly month-end MRR × 12.
- Bridge: a table that walks from opening ARR to closing ARR, one movement type at a time.
- New: ARR from customers who weren't customers at the start of the period.
- Expansion: extra ARR from existing customers: more seats, a higher tier, add-on products or price increases.
- Contraction: lower ARR from customers who stay: fewer seats, a lower tier, or a discount at renewal.
- Churn: ARR lost when a customer leaves entirely.
- Reactivation: ARR from a former customer who returns. Some companies show it separately; others treat it as new.
The standard layout
The formula is simple:
Closing ARR = Opening ARR + New + Expansion − Contraction − Churn (plus or minus any FX line, if you report one)
| Line | Common definition | Common variations |
|---|---|---|
| Opening ARR | Last month's closing ARR, unchanged | None. If it doesn't equal last month's closing, something has been restated and it needs explaining |
| New | Customers with zero ARR at the start of the period | Returning customers shown as "reactivation"; some split new logos by segment |
| Expansion | Net increase for customers live at both dates | Price increases shown as a separate "price" line |
| Contraction | Net decrease for customers live at both dates | Downgrades at renewal vs mid-term shown separately |
| Churn | Full ARR of customers who end with zero | Counted at notice date rather than contract end date |
| FX | Not needed if ARR uses fixed budget rates | A separate line if non-sterling contracts are translated at spot rates |
| Closing ARR | Must equal the customer-level ARR list at month-end | None |
The classification rules that cause most arguments
- Net per customer, per period. The most common approach compares each customer's ARR at the start and end of the period and classifies the net change. A customer who adds £5,000 of one product and drops £2,000 of another shows £3,000 expansion, not both lines. Some companies classify at product level instead, which makes expansion and contraction both look bigger. What matters is choosing one and saying which.
- Monthly vs quarterly bridges. A quarterly bridge built by comparing start and end of quarter will net out in-quarter movements. A quarterly bridge built by adding up three monthly bridges won't. The totals are the same; the lines aren't.
- Churn timing. Counting churn when the contract ends is the most common. Counting it at notice date is more cautious and shows problems earlier, but closing ARR then no longer matches live contracts.
- Reactivation window. A common rule is that a customer returning within 12 months of leaving is a reactivation; after that, they're new.
- Customer hierarchy. Decide whether a "customer" is a legal entity, a parent group or a billing account. If a subsidiary of an existing customer signs up, that's new under one rule and expansion under another.
AI shortcut: paste your bridge policy into an approved AI assistant and ask it to classify ten tricky test cases you write yourself (a parent company acquiring a customer, a downgrade on renewal, a customer returning after eight months). Where its answers differ from yours, your policy probably isn't clear enough. Fix the wording, not the test.
How to build the bridge each month
| Step | What "done" looks like | |
|---|---|---|
| ☐ | Export the customer-level ARR list at this month-end from the billing system | One row per customer, using the same customer ID as last month |
| ☐ | Put last month's closing list next to it, matched on customer ID | Every customer appears once, with opening and closing ARR |
| ☐ | Check the opening total equals last month's reported closing ARR | Difference is zero, or any restatement is explained |
| ☐ | Calculate the change for each customer: closing minus opening | A change column with no blanks |
| ☐ | Classify each change with a formula: opening 0 and closing above 0 = new (or reactivation); closing 0 and opening above 0 = churn; both above 0 and change positive = expansion; both above 0 and change negative = contraction | Every non-zero change has exactly one category |
| ☐ | Override only with a documented reason (for example a customer ID merge) | Each override listed with reason and approver |
| ☐ | Sum by category and build the bridge | Opening + movements = closing, and closing agrees to the customer list |
| ☐ | Check the big movers against contracts and CRM notes | Top five new, expansion and churn items agreed to evidence |
| ☐ | Reconcile closing MRR to ledger revenue | Gap explained (see the ARR vs MRR vs revenue guide) |
| ☐ | Get it reviewed and filed | Preparer and reviewer sign-off recorded |
AI shortcut: give an approved AI tool the two customer lists (opening and closing) and your classification rules. Ask it to produce the classified list and flag anything odd: customers whose ID changed, ARR moving by more than 50%, or a churned customer with an invoice this month. Review the flags, then check its totals against your own formula-based bridge before anything goes in the pack.
Worked example: MonthEndClub Co Ltd, November
MonthEndClub Co Ltd (fictional) closed October with ARR of £1,008,000. It classifies movements net per customer per month, counts churn at contract end, and holds all contracts in sterling, so there's no FX line.
What happened in November:
- Customer C, signed in October, went live on 1 November at £24,000 a year.
- Customer G signed and went live on 1 November at £36,000 a year.
- Customer B upgraded from £30,000 to £48,000 a year on 1 November, six months into a 12-month term.
- Customer D renewed on 1 November but dropped seats, from £27,000 to £18,000 a year.
- Customer E (£15,000 a year) let its contract end on 31 October and didn't renew.
Step 1: the customer-level list
| Customer | Opening ARR £ | Closing ARR £ | Change £ | Category |
|---|---|---|---|---|
| A | 60,000 | 60,000 | 0 | No change |
| B | 30,000 | 48,000 | 18,000 | Expansion |
| C | 0 | 24,000 | 24,000 | New |
| D | 27,000 | 18,000 | (9,000) | Contraction |
| E | 15,000 | 0 | (15,000) | Churn |
| G | 0 | 36,000 | 36,000 | New |
| All other customers | 876,000 | 876,000 | 0 | No change |
| Total | 1,008,000 | 1,062,000 | 54,000 |
Customer E's contract ended on 31 October, but under MonthEndClub's policy it was still live in the opening position used for the bridge, so its loss is shown as November churn. Some teams would show it in October. Either works if the rule is written down and used every month.
Step 2: the bridge
| ARR bridge, November | £ |
|---|---|
| Opening ARR, 31 October | 1,008,000 |
| New (C 24,000 + G 36,000) | 60,000 |
| Expansion (B) | 18,000 |
| Contraction (D) | (9,000) |
| Churn (E) | (15,000) |
| Closing ARR, 30 November | 1,062,000 |
| Net new ARR | 54,000 |
Check: 1,008,000 + 60,000 + 18,000 − 9,000 − 15,000 = 1,062,000, which agrees to the customer list total.
Step 3: the ratios people will ask for
All of these are for one month only. Don't compare them with annual figures without converting.
- Gross ARR lost in the month = (Contraction + Churn) ÷ Opening ARR = 24,000 ÷ 1,008,000 = 2.4%
- Monthly net revenue retention = (Opening + Expansion − Contraction − Churn) ÷ Opening = 1,002,000 ÷ 1,008,000 = 99.4%
- Monthly gross revenue retention = (Opening − Contraction − Churn) ÷ Opening = 984,000 ÷ 1,008,000 = 97.6%
- SaaS quick ratio = (New + Expansion) ÷ (Contraction + Churn) = 78,000 ÷ 24,000 = 3.25. Many investors look for something above 4 for an early-stage business, though benchmarks vary.
Step 4: why billings and revenue moved differently
Customer B's upgrade adds £18,000 to ARR straight away. But B is six months into its term, so the upgrade is invoiced pro rata for the remaining six months: £18,000 × 6 ÷ 12 = £9,000, plus VAT at 20% (UK standard rate as at October 2026).
| Account | Dr | Cr |
|---|---|---|
| Trade debtors | £10,800 | |
| Deferred revenue | £9,000 | |
| VAT output tax | £1,800 |
November's revenue from the upgrade is £9,000 ÷ 6 = £1,500, the same as the increase in MRR (£18,000 ÷ 12 = £1,500).
| Account | Dr | Cr |
|---|---|---|
| Deferred revenue | £1,500 | |
| Subscription revenue | £1,500 |
So one event shows up as £18,000 in the ARR bridge, £9,000 in billings and £1,500 in revenue. All three are correct.
If you report under US GAAP (ASC 606)
The bridge itself is a KPI, so it doesn't change. Under both IFRS 15 and ASC 606, an upgrade that adds distinct services at their standalone selling price is typically accounted for as a separate contract, and other modifications can be handled differently. The detail is covered in the contract modifications guide; the ARR classification stays the same either way.
Common mistakes and audit watch-outs
- Opening ARR that doesn't equal last month's closing. Usually a silent restatement. Show it as a separate line with an explanation.
- Bridge totals with no customer list. If the movements can't be traced to named customers, nobody can check them.
- Customer ID changes. A customer moved to a new billing account shows as churn plus new. Map old and new IDs before classifying.
- Price increases buried in expansion. If price rises drive most of the expansion, readers may want that shown separately.
- Adding up monthly bridges for a quarter and comparing with a start-to-end quarterly bridge. The lines won't match. Many teams settle on one method for quarterly reporting and note it in the pack.
- Letting AI classify without the formula check. AI is useful for flagging odd cases, but the categories come from documented rules and the totals are checked against a formula-driven sheet.
Tools that can help
Billing platforms such as Chargebee and Stripe Billing produce MRR movement reports that are a good starting point; check their rules for reactivation, trials and discounts against yours. Many teams build the bridge in Excel or Google Sheets from a customer-level export, which keeps the logic visible. Reporting tools such as Fathom present the result. No tool replaces a written classification policy and a reviewed bridge.
AI prompts to try
Use these only in AI tools your company has approved for customer and financial data. A person reviews every output.
- Classify the movements. Give it: opening and closing customer ARR lists and your policy. Ask: "Match these lists on customer ID, calculate the change per customer and classify each one as new, expansion, contraction or churn using the attached rules. Show totals by category." Check: totals agree to your own formula-based bridge.
- Find the odd ones. Give it: the same two lists. Ask: "List customers who appear under a different ID or name, customers whose ARR changed by more than 50%, and any customer at zero ARR who had an invoice this month." Check: each flag against the billing system.
- Draft the commentary. Give it: this month's and last month's bridge and your notes on the big deals. Ask: "Write three short sentences explaining the main ARR movements, naming the top two drivers by value." Check: every number against the bridge; add business reasons it can't know.
- Stress-test the policy. Give it: your ARR policy. Ask: "List ten real-world situations this policy doesn't clearly cover, with a suggested rule for each." Check: a person decides which rules to adopt.
Rates, thresholds and rules in this guide
Figures were checked against the pages below in October 2026. They change regularly (often each April or at Budget time), and we can't guarantee they're still current or right for your situation. Always check the official page before relying on them.
- VAT rates (GOV.UK): the UK standard VAT rate of 20%
Key takeaways
- Closing ARR = Opening + New + Expansion − Contraction − Churn, and closing must agree to a customer-level list.
- Classify net per customer per period, unless your written policy says otherwise.
- Write down the edge cases: churn timing, reactivation, customer hierarchy, price increases and FX.
- Expect ARR, billings and revenue to move by different amounts for the same event.
- Use AI to classify and flag, then check its totals against a formula-driven bridge before it goes in the pack.
FAQs
Should the bridge be monthly or quarterly?
Many teams build it monthly and report it quarterly to the board. Building monthly keeps the detail fresh and makes errors easier to spot.
Is a downgrade at renewal contraction or churn?
If the customer stays with any ARR above zero, it's contraction. Churn is typically only used when ARR goes to zero.
Where do one-off fees go in the bridge?
Nowhere. Setup, implementation and training fees aren't recurring, so they're excluded from ARR and the bridge. They appear in revenue instead.
Can AI build the whole bridge?
It can draft it from two customer lists and your rules, and it's good at spotting customers who changed ID or moved unusually. But the policy, the final classification and the sign-off stay with people, and the AI version is checked against a formula-built bridge.
Related guides
- ARR vs MRR vs Revenue: Why They Don't Match and How to Reconcile Them
- Net and Gross Revenue Retention: How to Calculate Them Correctly
- Upgrades, Downgrades and Mid-Contract Changes
- Monthly Management Accounts and Board Pack Layout
More in Metrics and Reporting guides.
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This guide is general information about common practice. It isn't tailored to any business, and standards, tax rules and figures change. Check your own circumstances, the latest rules and, where needed, a qualified professional before acting.
Last reviewed: October 2026.