Playbook

How to count recurring revenue in a services business, four ways

The same business reads as a different company depending on the numerator. Four readings from one ledger, and the spread between them.

The methodThe recurring revenue ladder: four rungs

This playbook gives a services business four ways to count its recurring revenue from the same ledger, and shows which of the four a buyer will count when they ask for annualised (annualized) recurring revenue. It is for founders and finance leads of consultancies, agencies and managed service providers who have one recurring revenue percentage and are not sure what it means, and for anyone heading into a fundraise or a sale, where the narrowest reading is the one that counts. The four readings run from contracted annuity at the bottom, through the product line and the planning model, to the management-accounts actual at the top. The spread between them is the size of the story the business is telling itself.

Every market threshold for recurring revenue quotes a percentage, and none of them defines its numerator. Software definitions do not transfer. A retainer that either side can cancel on a month's notice, a managed service with a minimum term, a support contract billed in arrears, and a customer who has simply come back every year are all called recurring by somebody, and they are worth very different amounts to a buyer. So the same business reads as a different company depending on which of them you count. The founder quotes one figure, the board pack shows another, the sales deck rounds up, and the diligence team arrives with a definition of its own.

The recurring revenue ladder has four rungs. Contracted annuity is the narrowest: revenue under signed contract for a defined term that the customer cannot leave without notice, which is what diligence means by the word. The product line is what the business sells as a recurring service, including customers who have not yet committed to a term. The planning model is what the forecast assumes will recur. The management-accounts actual is what the finance system labelled recurring in the period, however the labels were set. The playbook runs a nine-step sequence on your own ledger: define each rung, count it, calculate the spread between the highest and lowest reading, run the relative-growth test that shows whether the recurring line is gaining or losing share as the whole business grows, and name the forbidden reading. That is the flattering share produced by a taxonomy change, where a definition widened between one year and the next so the percentage rose without a single customer committing to anything more.

It is not a course on building recurring revenue; that is a separate piece of work here, and this playbook is only about counting honestly what already exists. It does not give a target percentage, because the right share depends on what you are building and for whom. And it does not tell you which rung to quote in public. It tells you to know all four, to say which one you are using, and to be able to reconcile any one of them to the others when someone asks.

I knew our recurring revenue number every month for the whole life of the business that became DevOpsGroup, a services company helping other businesses build and run software. We were told in the first year to aim for a high recurring share on long contracts, and I understood the target completely. What took longer was noticing that the company had several honest answers to how much of it recurred. The managed services line as the accounts labelled it, the product as we sold it, the share the plan assumed, and the contracted base a buyer would accept all gave different readings of the same ledger, and the flattering ones were the easiest to reach for in a board meeting. Anyone doing diligence counts the narrowest, and I knew that long before anyone did diligence on us. Knowing the number was never the problem; the mix moved slowly whatever we counted. What the ladder gave me afterwards was a way of saying, every time, which number I meant.

The playbook is in development, with an interactive counter that runs the four readings on your own ledger and a recurring revenue ladder worksheet. Joining the waitlist means you hear when it is ready, and tells me who is waiting. Nothing is for sale yet and there is no date.

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