MRR and cashflow both answer the question "how much money is your SaaS business making?". MRR is the average amount of money your SaaS gets from subscriptions every month. Cashflow is how much cold-hard-cash your SaaS gets per month.
MRR and cash flow sound like the same thing. For a long time, I thought they were the same thing. If you sold 1000 $10 per month subscriptions, your MRR would be 10K, and you would get 10K cash every month to pay bills. The amount of cash you had leftover after paying bills would be your net cash flow.
So why are SaaS companies so obsessed with MRR? Revenue can't be spent; only cash can be spent.
Cash flow gets a little more complicated when you start to sell annual plans. When you sell an annual plan, your SaaS will get the full year of payment straight away. If your product is $10 per month and your annual plan comes with a two-month discount, you get $100 upfront whenever you sell an annual plan.
Annual customers will only pay you a lot once per year, while monthly subscribers will pay you a little every month. Some SaaS companies will sell a lot of annual plans in some months, like in November, by using Black Friday sales, but don't sell many on other months. This means they get a lot of money (cash flow) on some months and a lot less on others.
The up-front money can be significant if you are running paid marketing. If you can spend $60 today to get an annual subscriber to pay you $100, you can continue spending more and more money on paid ads.
If you only get monthly subscribers from your paid ads, it isn't easy to scale spending because it takes six months for a subscriber to pay back the cost of running ads. Jason Cohen has an excellent talk about how he used paid ads and annual subscriptions to scale WPEngine.
If you are selling annual contracts, then cash flow can be unpredictable. In November, your cash flow might be really high if you are selling annual contracts with a Black Friday sale. It might be really low in December if you only sell monthly contracts during that month.
Cash flow can be really variable month-to-month, which makes it difficult to use as a measure of your business's health.
It's better to measure the business health using something more predictable that won't change hugely month-to-month unless we have made improvements. This way, you can see how the business improved (or got worse) financially each month. This is really important because if you are doing something that is improving your SaaS, then you want to know to keep doing it.
MRR is used as a measure of SaaS business' predictable revenue. Since the revenue is predictable, it can be modeled and forecasted. This predictability also allows investors and Private Equity firms to value SaaS businesses based on their MRR.
How much MRR do you get from selling an annual subscription? MRR is how much money your SaaS makes on average per month from subscriptions. This means that calculating MRR from an annual subscription is just dividing the annual price by 12. A $100 per year subscription has monthly recurring revenue of 100/12 = $8.125.
Annual subscriptions are often more valuable than monthly subscriptions, even though they have lower MRR.
But didn't I tell you that the goal is to get MRR as high as possible? Selling annual subscriptions can enable your SaaS to get a higher overall MRR.
The total MRR of your SaaS at the end of a month depends on how much it started with, how much it increased from new subscribers and upgrades by existing customers, minus how much it lost from downgrades and churn.
Total mrr = new mrr + expansion mrr - contraction mrr - churn mrr
new and expansion are often combined and called mrr growth.
Subscribers on annual plans can only churn once per year. While subscribers on monthly plans can churn once per month. This means that annual subscribers often have a lower churn rate than monthly subscribers. The lower churn rate means that you can continue to increase MRR without having to attract as many new customers per month.
MRR and cash flow are both important things to measure in your SaaS business. They both answer the question, "how much money are you making?" but in different ways.
Cash flow is critical to know so that you can pay your bills and re-invest into the business. MRR is important to know so that you can tell if your SaaS is getting healthier.