{"id":3520,"date":"2016-03-09T16:33:32","date_gmt":"2016-03-09T15:33:32","guid":{"rendered":"https:\/\/chartmogul.com\/blog\/?p=3520"},"modified":"2024-05-07T15:24:51","modified_gmt":"2024-05-07T13:24:51","slug":"saas-quick-ratio","status":"publish","type":"post","link":"https:\/\/chartmogul.com\/blog\/saas-quick-ratio\/","title":{"rendered":"SaaS Quick Ratio: How efficient is your growth?"},"content":{"rendered":"\n<p>In 2015, Social+Capital VC Mamoon Hamid <a href=\"https:\/\/youtu.be\/gcuJQ0RHPQc\">unveiled SaaS Quick Ratio<\/a> at the SaaStr Convention. Since then it\u2019s been a hot topic, emerging as part of investors&#8217; standard fundraising asks. <\/p>\n\n\n\n<p>So, we&#8217;ve put together everything you need to know about the metric, how (and when!) it\u2019s helpful to a SaaS business, and other things to consider when using SaaS Quick Ratio:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"#1\">What is SaaS Quick Ratio?<\/a><\/li>\n\n\n\n<li><a href=\"#2\">How to calculate SaaS Quick Ratio<\/a><\/li>\n\n\n\n<li><a href=\"#3\">What does SaaS Quick Ratio show?<\/a><\/li>\n\n\n\n<li><a href=\"#4\">SaaS Quick Ratio examples<\/a><\/li>\n\n\n\n<li><a href=\"#5\">Low, average, and high Quick Ratios<\/a><\/li>\n\n\n\n<li><a href=\"#6\">What&#8217;s a good SaaS Quick Ratio?<\/a><\/li>\n\n\n\n<li><a href=\"#7\">How can you use Quick Ratio?<\/a><\/li>\n\n\n\n<li><a href=\"#8\">Final Word<\/a><\/li>\n\n\n\n<li><a href=\"#9\">Quick Ratio: Dive deeper<\/a><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"1\">What is SaaS Quick Ratio?<\/h2>\n\n\n\n<p>A SaaS company&#8217;s Quick Ratio measures its ability to grow recurring revenue in spite of churn.<\/p>\n\n\n\n<p>The metric pits your gains against your losses, new business and upsells versus cancellations and downgrades. <\/p>\n\n\n\n<p>Quite simply: what is the ratio of the money coming <em>in<\/em> to the money going <em>out<\/em>? The higher the ratio, the more efficient the growth.<\/p>\n\n\n\n<p>Let&#8217;s take a look at how to calculate the ratio.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"2\">How to calculate SaaS Quick Ratio<\/h2>\n\n\n\n<p>To find SaaS Quick Ratio, divide added MRR by lost MRR. New and expansion MRR \/ churned and contraction MRR.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2.png\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"269\" src=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2-1024x269.png\" alt=\"\" class=\"wp-image-21599\" srcset=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2-1024x269.png 1024w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2-300x79.png 300w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2-720x189.png 720w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2.png 1280w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2024\/05\/image-2-300x79@2x.png 600w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/a><\/figure>\n\n\n\n<p>In order to calculate your SaaS Quick Ratio you need some revenue metrics at hand:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><a href=\"https:\/\/help.chartmogul.com\/hc\/en-us\/articles\/4416682609426#new-business\">New MRR<\/a><\/strong>&#8211; Monthly recurring revenue from new customers <\/li>\n\n\n\n<li><strong><a href=\"https:\/\/help.chartmogul.com\/hc\/en-us\/articles\/4416682609426#expansion\">Expansion MRR<\/a><\/strong>&#8211; Monthly recurring revenue from existing customer upgrades<\/li>\n\n\n\n<li><strong><a href=\"https:\/\/help.chartmogul.com\/hc\/en-us\/articles\/4416682609426#contraction\">Contraction MRR<\/a><\/strong>&#8211; Lost monthly recurring revenue from existing customer downgrades<\/li>\n\n\n\n<li><strong><a href=\"https:\/\/help.chartmogul.com\/hc\/en-us\/articles\/4416682609426#churn\">Churned MRR<\/a><\/strong>&#8211; Lost monthly recurring revenue from customer cancelations <\/li>\n<\/ul>\n\n\n\n<p>*Note: Depending on your business model you can substitute MRR for ARR.<\/p>\n\n\n\n<p><em>Need to brush up on other SaaS Metrics mentioned here? You can find them all in <a href=\"https:\/\/chartmogul.com\/blog\/the-ultimate-saas-metrics-cheat-sheet\/\" target=\"_blank\" rel=\"noreferrer noopener\">The Ultimate SaaS Metrics Cheat Sheet<\/a>.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"3\">What does SaaS Quick Ratio show?<\/h2>\n\n\n\n<p>The SaaS Quick Ratio looks at the bright and shiny side of your business and the underbelly at the same time (probably why investors like it so much).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Sustainable growth<\/h3>\n\n\n\n<p>As <a href=\"http:\/\/tomtunguz.com\/\" target=\"_blank\" rel=\"noopener\">Tomasz Tunguz<\/a> (Redpoint) put it, &#8220;The quick ratio measures a SaaS company\u2019s growth efficiency.&#8221; It\u2019s less about how much you\u2019re growing. It\u2019s more about how good you are at it, and if you can scale that revenue growth rate over time. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Can you bring in new business and keep the old? <\/h3>\n\n\n\n<p>It\u2019s no secret that maintaining low churn is key to the success of a SaaS business. It\u2019s key to a strong SaaS Quick Ratio as well. <\/p>\n\n\n\n<p>On their own, forward-looking metrics like MRR and customer acquisition all suggest promising growth. But upon deeper investigation, those metrics aren\u2019t able to mask a revenue-draining high <a href=\"https:\/\/chartmogul.com\/blog\/churn-basics-and-benchmarks\/\">MRR churn<\/a> rate. <\/p>\n\n\n\n<p>As a result, a low SaaS Quick Ratio exposes the unhealthy side of even the most impressive MRR growth.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"4\">SaaS Quick Ratio examples<\/h2>\n\n\n\n<p>To better illustrate what Quick Ratio shows us, let&#8217;s take a look at three hypothetical companies. It&#8217;s important to note that on paper they have identical Net MRRs ($8000). Keep in mind the formula above as we move forward.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Company 1-  $10,000 (New MRR + Expansion MRR) \/ $2,000(Churned MRR + Contraction MRR) \n<ul class=\"wp-block-list\">\n<li><strong>Quick Ratio = 5<\/strong><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>Company 2- $16,000 \/ $8,000 \n<ul class=\"wp-block-list\">\n<li><strong>Quick Ratio = 2<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p>Both companies have equal Net MRRs ($8K). Company 2, boasting $6K additional new business, might even appear to be the healthier business at first glance. <\/p>\n\n\n\n<p>Quick Ratio is a favorite among investors because it reveals that Company A is in a much better position to scale and reach revenue milestones with less effort than Company 2. <\/p>\n\n\n\n<p>In the most broken down form: Company 1 makes $5 for every 1$ lost while Company 2 only makes $2 in the same situation. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"5\">Low, average, and high Quick Ratios<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Low quick ratio (less than 2)<\/strong>: New revenue is not driving the business forward. Rather, it\u2019s merely replenishing the revenue lost through cancellation and contraction. Over time, more and more effort must be poured into New + Expansion MRR just to compensate for churn. Something, be it the product or customer success efforts, needs tuning before investors will commit.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Average Quick Ratio (2-4)<\/strong>: Churned and contraction MRR are eating into the new business and expansion revenue. The company is growing but it&#8217;s unclear if the growth is sustainable or scalable. Steps need to be taken to either reduce churn and contraction or greatly increase new business to achieve a higher Quick Ratio.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>High Quick Ratio (4 or more)<\/strong>: Growth rate is both high and stable. The product is successful, the customers are happy, and there is a good framework in place for the business to scale efficiently. Revenue will continue growing at an attractive, predictable rate. Ding, ding, ding!<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"720\" height=\"1261\" src=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-720x1261.jpg\" alt=\"Quick Ratio infographic\" class=\"wp-image-3542\" srcset=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-720x1261.jpg 720w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-171x300.jpg 171w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-584x1024.jpg 584w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x.jpg 1226w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-171x300@2x.jpg 342w, https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/SaaS_Quick_Ratio_Infographic@2x-584x1024@2x.jpg 1168w\" sizes=\"auto, (max-width: 720px) 100vw, 720px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"6\">What&#8217;s a good SaaS Quick Ratio?<\/h2>\n\n\n\n<p>Isn\u2019t that the question? There\u2019s an emerging debate around Quick Ratio benchmarks.<\/p>\n\n\n\n<p><a href=\"http:\/\/www.slideshare.net\/03133938319\/saastr\/22-Recap_whats_good_whats_bad\" target=\"_blank\" rel=\"noopener\">Hamid says<\/a> that a SaaS Quick Ratio of 4 indicates a healthy-enough growth rate for him to invest. This would mean you&#8217;re adding revenue 4x faster than you&#8217;re losing it. Sounds great, right?<\/p>\n\n\n\n<p>But Tomasz Tunguz raises <a href=\"http:\/\/tomtunguz.com\/what-is-quick-ratio-hiding\/\" target=\"_blank\" rel=\"noopener\">a very valid flag<\/a> when it comes to the 4 score. <\/p>\n\n\n\n<p>He found that, with a Quick Ratio of 4, companies can still sustain monthly churn rates of 5.0% or higher. And, <a href=\"https:\/\/chartmogul.com\/blog\/2015\/10\/actionable-saas-metrics-customer-churn-rate\/\" target=\"_blank\" rel=\"noopener\">to quote ourselves<\/a>, \u201cAnything over 3-5% should be sending warning signals.\u201d <\/p>\n\n\n\n<p>For some businesses, a Quick Ratio of 4 isn\u2019t high enough to overcome issues with churn.<\/p>\n\n\n\n<p>So, Quick Ratio is relative and evolves throughout a company\u2019s lifetime. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Quick ratio changes with the company<\/h3>\n\n\n\n<p><a href=\"http:\/\/www.insightsquared.com\/2016\/02\/benchmarking-quick-ratio-benchmarks-2016\/\" target=\"_blank\" rel=\"noopener\">InsightSquared<\/a>, in their study around benchmarking Quick Ratio, points out that \u201cAchieving a SaaS Quick Ratio of 4 is a good benchmark for young, high-growth companies but the equation changes as those companies reach scale.\u201d <\/p>\n\n\n\n<p>The growth characteristics of an established, fully-scaled company will be different than an early-stage startup. As the chart below illustrates. Therefore the SaaS Quick Ratio target, and the strategy toward it, will differ as well.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full is-resized\"><img decoding=\"async\" src=\"https:\/\/chartmogul.com\/blog\/wp-content\/uploads\/2016\/03\/21_ARR-growth-chart.svg\" alt=\"\" class=\"wp-image-21449\" style=\"aspect-ratio:1;width:840px;height:auto\"\/><figcaption class=\"wp-element-caption\">Growth is fast in the early stages of business and slows down as businesses mature. The top quartile of business in the $1-8m ARR range grows 70% annually. At scale ($8-30m ARR), the top quartile of businesses grow around 45% annually.<\/figcaption><\/figure>\n\n\n\n<p>In reality, you&#8217;ll need to find the right target for your company. What\u2019s certain is that no matter your Quick Ratio score &#8212; you should always keep an eye on churn.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"7\">How can you use Quick Ratio?<\/h2>\n\n\n\n<p>Here are some ways you can use Quick Ratio:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Tracking<\/strong> <\/h3>\n\n\n\n<p>VCs absolutely ask about your Quick Ratio. You can make sure you\u2019re in the best possible position by the time they come knocking.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Take note of accounts that are on contract, as they may skew the calculation!<\/li>\n\n\n\n<li>For companies in the first year of business, SaaS Quick Ratio isn\u2019t so helpful. With young customers and customers still in a commitment period, the ratio isn\u2019t a reliable indicator of anything. Focus your attention on individual metrics instead.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Insights<\/strong> <\/h3>\n\n\n\n<p>Tweak your analysis to discover new ways to improve.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Segment the metric into different business elements (such as payment plan or business vertical) to identify any weaknesses in specific parts of your business. Tightening up there will boost your score.<\/li>\n\n\n\n<li>Examine the metric for specific time periods. Though the formula is defined across a monthly period, analyzing quarterly or yearly periods could yield different results and prompt further investigation.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"8\">Final Word<\/h2>\n\n\n\n<p>Investors are looking at SaaS Quick Ratio to spot a profitable next move in the SaaS world. <\/p>\n\n\n\n<p>The currently accepted Quick Ratio benchmark is 4, but you need to evaluate what makes sense for your business. If you don&#8217;t feel confident with your SaaS Quick Ratio performance, identify what&#8217;s bringing it down. <\/p>\n\n\n\n<p>Let Expansion MRR actually drive your growth forward, not just replenish losses. Put that hard-earned new revenue to effective use by lowering churn, which will amplify your Quick Ratio score and deliver an impressive number to VCs.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">SaaS Quick Ratio FAQs<\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1692029330392\"><strong class=\"schema-faq-question\">What is an Acid Test?<\/strong> <p class=\"schema-faq-answer\">You might have heard of Quick Ratio before. Traditionally, &#8220;Quick Ratio&#8221; is a finance metric that gauges a company&#8217;s liquidity, or a company&#8217;s ability to pay off all current liabilities ASAP (aka the &#8220;<a href=\"https:\/\/en.wikipedia.org\/wiki\/Quick_ratio\" target=\"_blank\" rel=\"noreferrer noopener\">Acid Test Ratio<\/a>&#8220;). <strong>SaaS Quick Ratio<\/strong> is different.<br\/><br\/>Acid Test Ratio and SaaS Quick Ratio share something: they both give investors a snapshot of how promising \u2014 or risky \u2014 an investment may be. Let&#8217;s see how this new metric works for SaaS, specifically.<\/p> <\/div> <\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"9\">Quick Ratio: Dive deeper<\/h2>\n\n\n\n<p>If you\u2019d like to read more about SaaS Quick Ratio, the surrounding discussion, and the concepts involved, check out these other resources:<\/p>\n\n\n\n<p><a href=\"http:\/\/www.slideshare.net\/mobile\/03133938319\/saastr\" target=\"_blank\" rel=\"noopener\">Mamoon Hamid&#8217;s SlideShare introducing the metric<\/a><br><a href=\"http:\/\/tomtunguz.com\/what-is-quick-ratio-hiding\/\" target=\"_blank\" rel=\"noopener\">Tom Tunguz on what Quick Ratio is hiding<\/a><br><a href=\"http:\/\/christophjanz.blogspot.de\/2015\/02\/why-most-saas-startups-should-aim-for.html\" target=\"_blank\" rel=\"noopener\">Christoph Janz on aiming for negative MRR churn<\/a><br><a href=\"http:\/\/www.insightsquared.com\/2016\/02\/benchmarking-quick-ratio-benchmarks-2016\/\" target=\"_blank\" rel=\"noopener\">InsightSquared on benchmarking SaaS Quick Ratio<\/a><\/p>\n\n\n\n<p><script src=\"\/\/platform.twitter.com\/widgets.js\" async=\"\" charset=\"utf-8\"><\/script><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In 2015, Social+Capital VC Mamoon Hamid unveiled SaaS Quick Ratio at the SaaStr Convention. Since then it\u2019s been a hot topic, emerging as part of investors&#8217; standard fundraising asks. So, we&#8217;ve put together everything you need to know about the metric, how (and when!) it\u2019s helpful to a SaaS business, and other things to consider &hellip;<\/p>\n","protected":false},"author":15,"featured_media":3541,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12,1998],"tags":[41,125],"class_list":["post-3520","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-gtm","category-retention","tag-metrics","tag-vc"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>SaaS Quick Ratio: How efficient is your growth? | ChartMogul<\/title>\n<meta name=\"description\" content=\"What&#039;s a good Quick Ratio? 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