Annualised contract value (ACV) is a metric that measures the predictable recurring revenue that a company can expect to receive from its customers on an annual basis. ACV is a crucial figure for investors and businesses as it reflects the net value of contracted revenue over a given term.
ACV is calculated by multiplying the contract value by the number of years it is in place and then dividing it by the number of years in the contract. For instance, if a company signs a three-year-long contract for $30,000 per year, the ACV would be $30,000 multiplied by three, which equals $90,000, divided by three, which equals $30,000 per year.
ACV is vital for businesses because it allows them to determine their revenue growth rate, forecast the future revenue of a new client, and helps to calculate the lifetime value of a customer.
ACV is also essential for investors as it provides a clear understanding of the total revenue that a company can expect to receive over a certain period. This figure can be used to compare the performance of different companies and help investors make informed decisions about where to invest their money.
ACV is not always a clear-cut figure. Some contracts may have significant upfront fees or one-time payments that affect ACV. In these cases, businesses need to consider the length of the contract and the timing of any fees to calculate the true ACV.
In conclusion, ACV is an important metric that helps businesses and investors understand the value of a company`s contracted revenue. It allows for better forecasting, facilitates better decision-making, and provides a clearer picture of a company`s revenue growth potential. Understanding this figure is critical for businesses looking to grow and investors seeking to make informed investment decisions.