How to use the saas quick ratio, magic number and rule of 40 calculator
- Enter the recurring revenue at the start of the period and then what changed during it: revenue from new customers, expansion from existing ones, cancellations and downgrades. Use annual recurring revenue (ARR) for all five boxes.
- Enter the sales and marketing spend from the period before, because that spend takes time to turn into revenue.
- Enter the net cash burn for the period, the year over year growth in percent and the profit margin in percent.
- Read the quick ratio, magic number, burn multiple, Rule of 40 score and the two retention figures, with the formula for each in the table.
Formula
quick ratio = (new + expansion) / (cancellations + downgrades)
magic number = net new recurring revenue / sales and marketing spend in the prior period
burn multiple = net cash burn / net new recurring revenue
Rule of 40 score = year over year growth % + profit margin %
gross retention = (start - lost) / start; net retention = (start + expansion - lost) / start
Net new recurring revenue is new plus expansion minus cancellations and downgrades. The burn multiple is only defined when net new revenue is above zero, and the quick ratio only when something was lost.
A company growing from $2.4 million
The company starts with $2,400,000 of recurring revenue. In the period it adds $300,000 from new customers and $120,000 of expansion, and loses $90,000 to cancellations and $30,000 to downgrades. The quick ratio is $420,000 / $120,000 = 3.50 and net new revenue is $300,000.
With $450,000 spent on sales and marketing in the prior period, the magic number is 300,000 / 450,000 = 0.67. Burning $250,000 in cash to add $300,000 gives a burn multiple of 0.83. Growth of 38 percent and a margin of minus 5 percent give a Rule of 40 score of 33. Gross retention is 95.00 percent and net retention is 100.00 percent.
What each ratio is asking
The quick ratio asks how much growth you buy for each dollar of revenue you lose. The magic number asks how much new recurring revenue each dollar of the previous period's sales and marketing produced. The burn multiple asks how many dollars of cash it took to add one dollar of recurring revenue.
The Rule of 40 adds growth and profit margin, so a company can pass by growing fast with losses or growing slowly with profit. Retention separates what existing customers did from what new customers added. See the Churn Rate Calculator for the loss rates behind the ratios.
Using the figures well
These ratios are only comparable when they are built from the same definitions. Whether a price increase counts as expansion, whether a pause counts as a cancellation and how long a period is all change the result. A single period can also be noisy, so look at several in a row.
The numbers are arithmetic on a past period. They do not predict the next one. To go further, the Customer Lifetime Value Calculator and the CAC Payback Period Calculator look at the economics of a single customer, and the Burn Rate and Runway Calculator shows how long the cash lasts.
Assumptions and limits
- All revenue boxes use the same measure of recurring revenue, such as ARR. Mixing monthly and annual figures gives wrong ratios.
- The magic number uses the sales and marketing spend of the period before the one you describe, and the two periods are the same length.
- Growth and margin are entered directly. The page does not compute them from the revenue boxes.
- The Rule of 40 is shown as a score only. The page does not rate a company as good or bad.
- Cancellations plus downgrades cannot be more than the starting revenue, and nothing typed here leaves your browser.
Frequently asked questions
Why does the page say the quick ratio is not defined?
The quick ratio divides by what was lost to cancellations and downgrades. If nothing was lost, there is nothing to divide by. The page says so instead of showing an enormous number.
What is the difference between gross and net revenue retention?
Gross retention counts only losses from existing customers, so it can never exceed 100 percent. Net retention also counts expansion, so it can exceed 100 percent when upgrades outweigh the losses.
Why is the burn multiple not defined for a shrinking company?
The burn multiple divides cash burned by net new revenue. If net new revenue is zero or negative, the ratio would be meaningless or misleading, so the page leaves it out.
Should I use monthly or annual figures?
Use annual recurring revenue (monthly recurring revenue times 12) for the revenue boxes, and use the spend and burn for the same period length as the revenue changes, whether that is a month, a quarter or a year.