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Glossary

What is an ARR waterfall?

An ARR waterfall, or ARR bridge, shows how annual recurring revenue moved from the start of a period to its end, split into new business, expansion, contraction and churn. Each movement starts where the last one ended, so the opening figure plus every movement must equal the closing ARR exactly, with no balancing line.

How the waterfall adds up

Classify every change in a customer's ARR once, by what caused it, then add the movements to the opening figure. A returning customer is a reactivation, not new business.

Closing ARR = Opening ARR + New business + Expansion − Contraction − Churn

A worked example

In the illustrative example workspace, Gloaming Fescue Inc's ARR moved across June 2026 like this.

ARR waterfall, June 2026
OperationLineFigure
Opening ARR, 1 June$8.12M
+New business$0.11M
+Expansion$0.22M
−Contraction$0.02M
−Churn$0.01M
=Closing ARR, 30 June$8.42M

Expansion was twice new business this month. Across the 12 months to June the same bridge runs from $6.42M to $8.42M, up 31%.

Common mistakes

  • Netting a customer's movements

    A customer that adds one product and drops another has an expansion and a contraction. Netting them into one figure hides both.

  • Closing on a balancing line

    If the movements do not sum to the closing figure, something is misclassified. A line called other or adjustment is a plug, and it is where the errors hide.

  • Letting non-recurring revenue in

    Overage and one-off fees are not ARR, so they have no place in its waterfall. Show them on a revenue chart instead.

How Verlix handles it

Verlix classifies every ARR change by the contract event behind it, so each movement traces to a contract and the waterfall ties without a balancing line. The ARR and MRR waterfall is one of the standard reports, exportable to PDF.

SaaS financial reporting

Related terms

All glossary terms