What an ARR waterfall shows
An ARR waterfall is a reconciliation. It explains how you moved from a starting ARR snapshot to an ending ARR snapshot by breaking the change into new, expansion, contraction, and churned ARR.
Core formula
Ending ARR = starting ARR + new ARR + expansion ARR - contraction ARR - churned ARR.
How to use it
- Use it quarterly if monthly ARR snapshots are noisy due to deal timing.
- Segment by plan/channel/customer size when blended numbers hide churn pockets.
- Use net new ARR as a consistent input to burn multiple (same period).
How to reconcile with cash and bookings
- ARR is a run-rate; bookings and cash can lead or lag due to billing terms.
- Track annual prepay separately so it does not inflate ARR movements.
- Use the same period boundary for ARR waterfall and burn metrics.
ARR waterfall QA checklist
- Confirm each customer movement is counted once (new vs expansion).
- Validate churn and contraction are based on starting ARR, not ending ARR.
- Match the ending ARR to the actual snapshot after all movements.
Common mistakes
- Mixing bookings/cash with ARR movements (different timing and definitions).
- Including one-time items or services in ARR movements.
- Using inconsistent time windows for ARR movements vs burn/spend metrics.