Stumptownfin.com

Portland's finest Finance blog and resource
  • About
  • About the Owner
  • Industry Links
  • Legal Information
  • Welcome to Stumptown Finance

How to Calculate the Total Contract Value

  • Home
  • /
  • SaaS
  • /
  • How to Calculate the Total Contract Value

How to Calculate the Total Contract Value

By James Bell

  • Finance , Higher Level Management , Metrics and Ratios , SaaS ,
  • 26 Nov

Total Contract Value is the total committed revenue of recurring and one time charges. This metric is also referred to as CV or TCV.  It is a forecast that is helpful in budgeting and allocating resources effectively.  This metric can help marketing and sales managers know which customers are more profitable than others.  It also helps with revenue  and cash flow projections.

We will look  at calculating this metric by weekly and monthly billing cycles.  If the contract is for a one time purchase, then the Price of the contract is the Total Value. Changes in periods  lengths and amounts in different contracts can have a dramatic effect with this metric. It’s important to normalize CV’s when you can for a better comparison.

Their can be different ways of normalizing this metric and it’s important for management and other analysts to find and use a consistent way to measure and compare contracts.

 

Total Contract Value for Weekly Billing Cycles

 

 

    \[ TCV =One\  T ime\  Fees + \frac{Price}{Days\  in\  Billing\  Period}*(End\  Date - Start\  Date) \]

where

TCV Total Contract Value

End\  Date End date of Contract

Start\  Date Start Date of Contract

Price

This is what you bill your customers. If you only bill once to use a product forever, then your Total Contract Value = Price. This is why many companies like the SaaS model. Manufacturing and re-sellers can find extra revenue in service contracts if you can find a way to add more value to existing customers.

Number of Days in Billing Period

This is the total number of days between what you charged in your price. Weeks and months don’t line up so we use break price down by day.

End date of Contract

It’s important to keep this consistent from period to period as you need to use this formula to describe a point over time.

Start date of Contract

Same things goes with the start date. Depending on how you bill will drive a lot of how these dates work.

 

 

Total Contract Value for Monthly Billing Cycles

 

 

 

    \[ TCV = MRR * n + One Time Fees \]

where

MRR Monthly Recurring Revenue

n Number of Months

Total Contract Value

If you charge a flat one time fee or charge then the total contract value is the dollar amount of the contract. If the contract is broken out into different billing cycles, there are a couple of ways to determine the TCV.

Monthly Recurring Revenue

This is the amount of revenue coming in each month. For the TCV,  you’ll use the the MRR for each month of a longer term contract.

Number of Months

This is the number of periods in the contract. If you are on an annual billing cycle, you can swap out monthly recurring revenue for annual recurring revenue.

One Time Fees

If you have one time fees or charges, you can add these on to the end of the formula. Keep the one time nature in mind when forecasting as you don’t want to include one time revenues in a recurring manner.

 

Other Considerations

If you don’t have a contract, then there is an increased amount of risk. People change their mind and you may not know what a competitor is whispering into your clients’ ear. Revenues become less predictable as more risk comes into play. This is due to the increase in volatility and accuracy concerns in forecasting actual revenues for future periods.

    Recent Posts

  • Overall Equipment Effectiveness

    15 March 2020

  • Cash Conversion Ratio

    15 December 2019

  • Cash Value Added

    14 November 2019

  • Practical Tips for Achieving Your Financial Goals

    07 November 2019

  • Price-to-Research Ratio

    12 October 2019

  • Economic Value Added

    26 September 2019

  • Create a Virtual Environment for Jupyter Notebook

    11 September 2019

Categories

  • Accounting
  • Computer Science
  • Corporate Strategy
  • Data Science
  • Economics
  • Finance
  • Higher Level Management
  • Manufacturing
  • Marketing and Advertising
  • Mergers and Acquisitions
  • Metrics and Ratios
  • Programming
  • Project Management
  • Regulatory
  • SaaS
  • Skills and Attributes
  • Statistics
  • Tax updates
  • Tips and Tricks

Powered By Impressive Business WordPress Theme

Terms and Conditions