How to Accurately Calculate Monthly Recurring Revenue

MRR - Monthly Recurring Revenue acronym, business concept background

Some fire and security companies focus on installations and one-time projects. But, most thrive by providing regular inspections and maintenance for their customers’ fire safety and security systems. When a large part of a company’s revenue comes from recurring services, the best way to assess its growth and financial health is different from other companies.

Looking at quarterly growth and annual recurring revenue still matter. But, keeping track of your monthly recurring revenue is an important way for you to know the true value of your fire or security business. Here are some tips for accurately calculating your monthly recurring revenue (MRR):

Your Company’s Services and Types of Revenue

First, you want to outline the types of services your company offers based on the types of revenue they generate.

For most fire and security companies, this will come down to several major categories:

  • Installations and one-time projects
  • Ongoing inspection, monitoring, and/or maintenance contracts
  • Fees for upgrades, extra services, or additional equipment

It can be helpful to speak to your technicians and office staff when going through this exercise. They can give even more insight into what customers are asking for and what services sell best. You may even identify new opportunities to expand your services!

Once you have outlined the categories, list out your current customers and the specific services they are receiving from your company. This will give you a clear picture of what types of revenue make up the majority of your MRR.

Recurring Revenue: The “Bread and Butter” of Your Life Safety Business

Now, you can set aside the services and sales that are not recurring by nature. Then, calculate the current monthly recurring revenue for each customer by taking the total amount they pay each month for their services and contracts. If a customer has many services or contracts with different lengths and payment frequencies, convert them into a monthly cost.

For example, if a customer pays for quarterly fire inspections and annual security monitoring, add up the cost of all three services in a year and divide by 12 to get their monthly cost. We will show you how to keep using this MRR formula to establish your business’s overall monthly revenue in a moment.

Recurring Revenue that Isn’t MRR

You may have customers who re-purchase equipment from you or request more services often enough to be predictable, but these are not types of MRR. Your monthly recurring revenue is revenue generated from inspections and monitoring contracts. These are the services that a customer would have to cancel in order from them not to happen.

Being aware of how to measure your revenue on a monthly basis, even when your service contracts are of varying lengths, is an important skill. And once you do it the first couple times, it is easier to keep up with it as you become more comfortable.

Why Monthly Recurring Revenue Reflects Your Company’s True Value

While every type of revenue your company generates is valuable, recurring revenue is often considered the most valuable because it is reliable. It also allows you to have a more accurate picture of your company’s growth and financial health. This is especially true if a large part of your revenue comes from recurring services.

You may have new installations and one-time projects that bring in large sums of money. But, they do not guarantee long-term growth for your business. These types of sales can also be harder to predict and rely on for consistent cash flow.

On the other hand, MRR allows you to track not only immediate revenue but also your customer retention rate. This metric is vital in determining the true value and potential growth of your company. The more recurring revenue you have, and the higher your retention rate, the more stable and successful your business is likely to be.

Using Predictable Revenue to Grow Your Business

So now that you understand the importance of MRR, how do you use it as a tool for growth? Tracking and calculating your MRR allows you to set goals and plan for the future. It can also help you make informed decisions about investment in new technology or expanding your services. By regularly reviewing and analyzing your MRR, you will have a better understanding of trends in your business and in the industry as a whole.

How Monthly Recurring Revenue Prepares You for the Future

Tracking MRR also makes it easy to have a true sense of your company’s value if you decide to sell part or all of your business. You will have a solid understanding of what your business is worth. This will help you form realistic expectations and know when the offers you receive are too low.

Potential buyers will be interested in the stability and predictability that MRR offers. They will want to see a history of consistent growth in MRR, as well as a high retention rate for your services. Already having this information prepared will be a good sign to buyers. It shows them that you maintain a strong awareness of your business’s financial state. It can also help the negotiation process go faster, as you won’t have to gather the information before talking numbers.

Calculating MRR: A Basic Formula to Help You Get Started

We’ve outlined how to identify your sources of monthly recurring revenue. Now, we want to leave you with a formula you can use to get started calculating MRR.

The MRR Formula

  1. Determine the services that generate recurring revenue for your company. This may include service agreements or contracts, monitoring fees, and equipment leases.
  2. Add up all of the revenue from these services that occur over a year’s time (you can also do this semi-annually or by quarter, if it makes more sense for your business).
  3. Adjust for any changes in the customer base, such as new customers being added or existing customers canceling their services.
  4. Divide the total recurring revenue by 12 (or six or four, if you chose a different total time period to include in step 2). That will give you a general idea of your total monthly recurring revenue.
  5. You can also divide the total recurring revenue number by the number of customers to calculate the average revenue per customer, and then divide that by the multiple of months you assessed in your total number.

It is important to accurately track and calculate your MRR on a regular basis, as this number can give you valuable insight into the stability and growth of your fire and security business. It can also help in forecasting future revenue and setting goals for your company. Remember to always adjust for any changes in your customer base, as this can greatly affect your MRR.

And, while this formula will give you a ballpark estimate of your company’s monthly recurring revenue, the best and most accurate way to most fully understand the MRR your business is generating is to work with a broker like Acquisition & Funding Services to analyze what your business is worth.

Need Help Calculating or Increasing Your Monthly Recurring Revenue? AFS Can Help!

At AFS, we offer a variety of services for fire and security companies, including business valuations, financing, and help as you prepare your business for sale. Our team can help you increase your MRR and take your business to the next level. We can also help you optimize your business so you receive the offers you want.

Contact us online or give us a call at 800-354-3863 today to learn more about how we can partner with you to achieve success.

Related Resources

Looking for more insight related to monthly recurring revenue in the security, life safety, and fire protection industries? The following resources are a good place to start:

Where to Look for Valuable Contracted RMR – Looking to build revenue by adding new sources of recurring revenue? Learn about a few key places where you can find recurring revenue that can help to bolster your profitability and company value.

The Importance of Recurring Revenue in the Security Alarm Industry – Take a closer look at what makes recurring revenue so impactful for alarm companies and security businesses.

Growing Recurring Revenue Through Commercial Security – If you’re in the alarm, security, or life safety industries, commercial security is a great market to explore if you’re in search of additional opportunities to generate recurring revenue.