The install number gets the applause. It is large, arrives in one or more installments, and it can make a good month look like a great one. A big commercial job closes, the board sees the total, and everyone goes home pleased.

The number that decides what the company is worth is much less impressive. It is the recurring monthly revenue (RMR) that will still be arriving next year, and the year after, because a customer signed an agreement and keeps paying on it. One-time installation and equipment revenue is never RMR, and neither a buyer nor a lender will treat it as though it were.

Billed revenue and owned revenue

For years I reported one figure on our insurance renewal in good faith: fewer than one percent of our accounts were missing a contract. When a lender's requirements finally made us reconcile every account, the real figure was closer to twelve. Everyone had believed the first number. No one had measured it.

That experience left me with a working definition. Revenue is owned when four things are true of it. It recurs. It sits under a signed, current agreement you can produce. The customer is paying on time. And the agreement can be assigned to someone else, because a buyer or a lender needs to be able to step into it.

Billing systems report the first of those four and stay silent on the rest.

Four subtractions

Getting from billed to owned takes four subtractions, and the published guidance on each is consistent.¹

Take out sales tax. Take out third-party charges you collect and pass along, such as application fees, cellular fees or other communications fees. Take out accounts more than 90 days past due. Then take out, or at least mark down, the accounts with no signed contract on file, a missing signature, or a form that cannot be assigned.

What remains is a smaller number than the one on the billing report, and it is the one an outside party will use. Run the subtraction yourself and the result is information. Wait for a buyer's diligence team to run it and the result is a price reduction.

Attrition, measured in dollars

Owned revenue also has to be kept, and here the usual measure can flatter a company. Attrition is often reported by counting accounts. Lose one account out of a hundred and the report says one percent.

Suppose that one account was a commercial customer paying $250 a month for cloud video monitoring, in a base where most customers pay far less. Counted by number of accounts, the loss is one percent. Counted by revenue, it is about seven.² The same event produces two different numbers, and only the percentage describes what happened to the value of the company.

Gross attrition of around ten percent a year is the commonly cited industry norm.³ Whether a given figure is healthy depends on the mix beside it. Nine percent can be fine on a residential base and a warning on a base made up of commercial fire accounts, which are expected to stay much longer. An attrition figure with no account mix next to it tells an outsider very little.

A one-page report

None of this requires new software. It requires a page that someone produces every month and that leadership reads. Four lines are enough to begin:

RMR as billed. RMR after the four subtractions. Attrition for the trailing twelve months, measured in percentage of recurring revenue. The share of accounts with a complete, signed, current contract on file. Then watch this number over time.

The first month this page exists, it will probably contain at least one unwelcome figure. That is the page doing its work. A company can only improve the numbers it is willing to look at, and the unwelcome figure was true before anyone wrote it down.

I have watched leadership teams prefer the parts of a report that confirm what they hoped, and I understand the pull. The whole picture is harder to present and far more useful to have ownership over.

Which of the four lines could you fill in today without asking anyone? The Alarm Company Valuation Estimator will take whatever you have, including "I don't know," and show what each answer does to a range.

This article is educational. It is not legal, tax or financial advice, and it is not an appraisal or opinion of value.