An ARR waterfall reconciliation walks beginning ARR to ending ARR through every movement that occurred in the period. Reconciliation is the part that matters. The categories have to sum to the reported ending balance with no plug line, and each month's beginning balance has to equal the prior month's ending balance. Without those two checks the waterfall is a chart, not a control.
The movement categories
ORM structures the monthly reconciliation with contraction and expansion split into their causes rather than lumped into two totals. Pete Furseth lays out the ORM version as beginning ARR, then churned customer ARR, churned product ARR, and product decrease ARR on the contraction side, then new customer ARR, new product ARR, and increased product ARR on the expansion side, closing at ending ARR. Gross revenue retention and net revenue retention sit on the same chart. In his words, this reconciling waterfall by month is magic.
The split matters because the response differs by cause. A customer leaving entirely is a relationship failure. A customer dropping one product while keeping three is a product or packaging failure. Both land in a single churn bucket if the categories are collapsed, and the number tells you nothing you can act on.
Why reconciliations break
Movements get double coded or dropped. A customer who swaps one product for another creates a churned product line and a new product line in the same month, and recording only one puts the month out by the difference. Contract changes dated mid-month, foreign currency converted at different rates in different systems, and CRM edits made after the period closed all produce the same symptom. The balance is right, the movements do not add up to it, and someone adds an adjustment line to close the gap. That line is where board credibility goes.
Reading it in a board package
The reconciliation answers the question directors ask first, which is where growth actually came from. New logos, expansion, and churn each land as separate bars, so a quarter that hit plan on the back of one large expansion looks different from one built on new business. Pair it with net revenue retention calculated off the same categories, and the retention rate stops being an assertion.
The reconciliation is also a forecasting input. Each movement category has its own behavior over time, and modeling them separately produces a cleaner projection than growing a single ARR number forward. Our walkthrough of how to forecast revenue covers that decomposition, and forecast accuracy improves once churn and expansion stop being averaged together.
Frequently Asked Questions
What does it mean for an ARR waterfall to tie?
Beginning ARR plus every expansion category minus every contraction category equals ending ARR, with no plug line and no rounding bucket. Beginning ARR for the month also equals ending ARR from the prior month. If either check fails, the movement categories are miscoded or the balance was pulled from a different source than the movements.
Why does the waterfall stop tying out?
Almost always because one change got coded into two categories or none. A customer who drops one product and adds another shows as churn and new product in the same month, and unless both are recorded the net lands wrong. Mid-month contract changes, currency conversion at inconsistent rates, and manual CRM edits after the close date produce the same effect.
Should the reconciliation run monthly or quarterly?
Monthly. A quarterly view collapses offsetting movements inside the quarter, so a month of heavy churn covered by a large expansion deal disappears entirely. The monthly series is also what makes gross and net retention readable, because each rate has a clean beginning balance behind it.
Where do gross and net retention sit on the waterfall?
On the same chart, calculated from the same movement categories. Gross retention uses beginning ARR and the contraction lines only. Net retention adds expansion from existing customers. Both must exclude new customer ARR, which is the most common calculation error in retention reporting.
Put these metrics to work
ORM builds custom revenue forecast models that turn concepts like arr waterfall reconciliation into prescriptive action for your team.
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