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  • Rule of 40 Formula

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    The Rule of 40 is a measure used by SaaS companies to balance growth and profitability, where the sum of a company's annual revenue growth percentage and EBITDA margin percentage should equal or exceed 40. It allows for tradeoffs between profit and growth, so if growth is down, profit must be up, or vice versa, to still achieve the Rule of 40. The example P&L shows a company with 32% EBITDA margin and 14% revenue growth for a total of 46%, demonstrating compliance with the Rule of 40.

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    The Rule of 40 is a measure used by SaaS companies to balance growth and profitability, where the sum of a company's annual revenue growth percentage and EBITDA margin percentage should equal or exceed 40. It allows for tradeoffs between profit and growth, so if growth is down, profit must be up, or vice versa, to still achieve the Rule of 40. The example P&L shows a company with 32% EBITDA margin and 14% revenue growth for a total of 46%, demonstrating compliance with the Rule of 40.

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    9 views3 pages

    Rule of 40 Formula

    Uploaded by

    yann2
    The Rule of 40 is a measure used by SaaS companies to balance growth and profitability, where the sum of a company's annual revenue growth percentage and EBITDA margin percentage should equal or exceed 40. It allows for tradeoffs between profit and growth, so if growth is down, profit must be up, or vice versa, to still achieve the Rule of 40. The example P&L shows a company with 32% EBITDA margin and 14% revenue growth for a total of 46%, demonstrating compliance with the Rule of 40.

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    Rule of 40

    www.TheSaaSCFO.com
    https://www.thesaascfo.com/rule-of-40-saas/

    Rule of 40 Formula

    It's a tradeoff between profit and growth. If you forsake one for the other, you still need to achieve 40% or greater
    Profit can be down but growth must be up. Or vice versa. Profit up, growth down.

    Rule of 40
    Tradeoff

    P&L Example
    July YTD
    2018 2017 YOY Growth
    Recurring Revenue 25,000 22,000 14%
    COGS 5,000 4,300
    Gross Margin 20,000 17,700
    OpEx 12,000 11,000
    EBITDA 8,000 6,700

    EBITDA % 32% 30%

    Profit + Growth = Rule of 40


    32% 14% 46%
    to achieve 40% or greater when adding profit + growth.

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