Over the past two years, companies in the Subscription Economy Index have experienced 11% faster revenue growth compared to the S&P 500. Projections also suggest the global subscription economy could reach $1.5 trillion by 2025. These numbers show just how much business models have shifted toward recurring revenue.
Why Subscriptions Business Matters
Subscription revenue has moved from a niche strategy to a mainstream business model across nearly every industry. Unlike one-time purchases, subscriptions create ongoing financial obligations that need to be tracked and accounted for every single month. For financial advisors, bookkeepers, and accountants working with subscription businesses, this means learning new methods for tracking, forecasting, and reporting.
Revenue recognition gets more complicated. Cash flow forecasting relies on different assumptions. And the entire financial picture depends on understanding three core metrics: Monthly Recurring Revenue, Churn, and Customer Lifetime Value. These aren’t just operational dashboards for executives. They directly impact how you book revenue, calculate allowances, forecast cash, and prepare financials that comply with GAAP standards.
What Is MRR And Why Does It Matter
Monthly Recurring Revenue measures the predictable recurring income your clients generate from customers every month. It’s the foundation of subscription accounting. To calculate it, you multiply the total number of paying customers by the average revenue per user each month. So if your client has 200 customers paying an average of $50 per month, MRR is $10,000.
But MRR isn’t static. It changes constantly based on what customers do. New MRR comes from first-time signups. Expansion MRR happens when existing subscribers upgrade their plans or buy additional features. Contraction MRR is what you lose when customers downgrade to cheaper plans. Churned MRR is the recurring revenue that disappears when customers cancel completely.
Each of these movements affects the general ledger in real time. New MRR flows into deferred revenue when the customer gets billed, and then you recognize it as revenue over time as the service gets delivered. Expansion MRR adjusts both the deferred revenue balance and the revenue recognition schedule going forward. Contraction and Churned MRR reduce both accounts receivable and future revenue you can recognize.
Here’s the critical thing to remember. MRR is a management metric. It is not a GAAP number. GAAP revenue recognition follows ASC 606, which has five steps: identify the contract, figure out the performance obligations, determine the transaction price, allocate that price, and recognize revenue when you satisfy each obligation (Source: stripe.com). For subscription businesses, this usually means recognizing revenue evenly over the subscription period. MRR gives you a forward-looking view of expected revenue, but the number on your income statement may be different due to timing, payment delays, and changes to contracts.
You need to reconcile MRR movement to the deferred revenue and AR ledgers every single month. When MRR goes up, deferred revenue should increase by the same amount if your client bills in advance. When MRR drops because of churn or downgrades, you need to write off or adjust the corresponding deferred revenue liability.
Measuring Churn: Customers vs Revenue
Churn is how you measure the customers or revenue a business loses over a specific period. Customer churn is calculated by dividing the number of customers who left during the month by the total number of customers at the start of that month. Revenue churn is calculated by dividing the MRR lost during the month by the total MRR at the beginning of the month.
Both metrics matter, but revenue churn usually tells you more. A business can lose just a few high-paying customers and take a serious revenue hit, even if customer churn looks low. That’s why accountants need to track both.
According to Recurly’s 2024 benchmark data, the median monthly churn rate across all subscription businesses sits around 1.89% (Source: recurly.com). But this varies a lot depending on whether you’re B2B or B2C. B2B businesses typically see annual churn rates around 5.6%, while B2C businesses experience closer to 6.8% because consumer subscriptions are easier to cancel and purchase decisions are less complex. Churn also varies by how much customers pay. Businesses with average revenue per user below $10 or between $50 and $100 tend to have the lowest churn rates, around 3.4% to 3.8%. Higher-priced subscriptions above $250 see churn closer to 5.9%.
Churn has real accounting consequences you can’t ignore. When a customer cancels, you have to adjust deferred revenue immediately. If they have already paid for future months, your client might owe them a refund, which creates a liability on the books. If they haven’t paid yet, you reduce accounts receivable and may need to increase your bad debt allowance.
You should also separate voluntary churn from involuntary churn. Voluntary churn is when someone actively decides to cancel. Involuntary churn happens when a payment fails because a credit card expired, there weren’t enough funds in the account, or the bank declined the transaction. Involuntary churn is often recoverable if you have good dunning and retry systems in place, so track it separately for reconciliation and forecasting. Reducing involuntary churn improves cash flow stability and cuts down on write-offs.
Calculating LTV:
Customer Lifetime Value estimates how much total revenue you can expect from a single customer over the entire time they stay subscribed.
The most common formula is simple: LTV equals ARPU divided by churn rate. So if your average revenue per user is $500 per month and your monthly churn rate is 10%, LTV is $5,000.
This formula is widely used because it’s straightforward and relies on metrics most subscription businesses already track. But it has limitations. It assumes ARPU and churn rate stay constant, which rarely happens over long periods. It also ignores gross margin, which is crucial when you’re analyzing profitability.
For more accurate internal forecasting, you should calculate gross margin adjusted LTV instead. That means you multiply ARPU by the gross margin percentage, then divide by churn rate. Gross margin accounts for the direct costs of serving each customer, like hosting fees, customer support costs, and payment processing expenses. Gross margin adjusted LTV gives you a clearer picture of actual customer profitability and should be the number you use when advising clients on pricing, retention investments, or valuation models.
LTV also feeds into accrual accounting and allowance estimates. If LTV is declining over time, that’s a red flag. It could mean churn is rising or ARPU is falling, and both of those increase credit risk. That might require you to set aside higher allowances for doubtful accounts. LTV trends are especially important when auditors are reviewing revenue forecasts and deferred revenue balances.
Practical Tracking, Reconciliation, And Financial Controls
Tracking MRR, churn, and LTV requires pulling data from several different sources.
Billing platforms like Stripe and Recurly generate transaction-level data that includes subscriptions, upgrades, downgrades, and cancellations (Source: stripe.com, recurly.com). Payment processors give you settlement reports, logs of failed payments, and refund data. Subscription analytics tools like Baremetrics and ProfitWell pull all of these data streams together and calculate metrics automatically.
Don’t rely on just one data source. Cross-checking billing platform exports against bank deposits and general ledger entries is essential for catching discrepancies before they become bigger problems. For example, the MRR that Stripe reports should match the sum of all active subscription line items in your billing system. It should also tie back to the deferred revenue balance in your ledger.
Here’s a simple monthly close checklist you can use for subscription businesses. First, reconcile MRR movement to your AR and deferred revenue ledger. Verify that new MRR matches new invoices, expansion MRR matches upgrade invoices, and churned MRR matches canceled invoices. Second, reconcile failed payments and involuntary churn. Check dunning reports, retry logs, and card updater results to confirm which failed payments were recovered and which ones you had to write off. Third, confirm that your revenue recognition treatment follows ASC 606. Make sure revenue is being recognized evenly over the performance period and that any contract modifications are accounted for correctly. Fourth, update your LTV inputs. Recalculate ARPU and churn rate every month so your LTV forecasts stay accurate.
Financial controls around billing are absolutely critical for subscription businesses. Billing retry logic, dunning workflows, and payment method validation reduce involuntary churn and improve cash flow stability. Bookkeepers need to track these controls every month and flag any gaps that could lead to revenue leakage. For example, if retry logic isn’t configured correctly, failed payments might never get attempted again, and that results in permanent revenue loss.
How These Metrics Inform Advisory Work
MRR, churn, and LTV aren’t just accounting numbers. They’re strategic tools that financial advisors use every day. MRR provides the baseline for revenue forecasting and budgeting. Churn reveals retention risks and helps you model downside scenarios. LTV informs pricing strategy, customer acquisition cost targets, and valuation multiples.
But here’s what advisors must understand. You have to reconcile operational KPIs with GAAP financials every single month. MRR is a forward-looking metric based on active subscriptions. Recognized revenue is based on performance obligations that have actually been satisfied. These two numbers rarely match in any given month because of timing differences, contract modifications, and deferred revenue balances. Monthly reconciliation ensures that management dashboards line up with audited financials and that investors get accurate reporting.
Churn rates also inform financial planning in a big way. High churn might mean your client needs to spend more on marketing just to maintain growth, and that affects cash flow projections. LTV to CAC ratios guide investment decisions and help you determine whether a subscription business model is actually sustainable. If LTV is declining faster than customer acquisition cost, the business is probably over-investing in new customer acquisition at the expense of keeping existing customers happy.
Conclusion
Track MRR to understand revenue momentum and reconcile it to your deferred revenue balances every month. Separate voluntary churn from involuntary churn so you can identify real retention risks and recovery opportunities. Calculate LTV conservatively and use gross margin adjustments when you’re advising clients on profitability. Reconcile these metrics to GAAP financials monthly and use benchmark data to set realistic expectations. Subscription accounting is complex, but these three metrics give you the foundation for accurate reporting and strategic advisory work.MagicBooks helps subscription businesses automate bookkeeping and track MRR, churn, and LTV in real time, ensuring accurate reconciliation and GAAP compliance. Learn more here.
