What is SaaS Quick Ratio?SaaS Quick Ratio is used to measure the growth efficiency of a company, but is often overlooked by early stage entrepreneurs and investors. Think of SaaS Quick Ratio as a health measure of company growth.
Early stage companies with a ratio of 4 or higher are considered healthy. This ratio becomes more difficult to maintain with growth. At a SaaS Quick Ratio of 2, you are losing half of your new Monthly Recurring Revenue (MRR) every month.
How to calculate SaaS Quick Ratio
ƒ (New MRR + Expansion MRR) / (Churn MRR + Reduction MRR)
Date created: Feb 24, 2019
Latest update: Aug 09, 2019
Tell me more about this metric
SaaS entrepreneurs are at an increased risk of being overly distracted by vanity metrics. Early stage investors want to see top line "hockey stick charts" and metrics that may only be loosely correlated to sound financial performance. Unfortunately, early stage SaaS entrepreneurs are often distracted by trying keeping pace with the vanity metrics of their competitors so they can continue to receive follow-on funding.
The SaaS Quick Ratio is calculated by dividing Monthly Recurring Revenue (MRR) added by MRR lost.
The higher the ratio the better. Early stage companies are generally considered to be fairly healthy with a SaaS Quick Ratio of 4 or higher, but there is no hard and fast rule on this.
Why is this ratio so important? Without factoring in the SaaS Quick Ratio you are more likely to be obsessed at adding Net New MRR at all cost. Fuelling the growth of a business with a low SaaS Quick Ratio is like filling up a gas tank that has holes in it. A company with a SaaS Quick Ratio of 2 is essentially losing half of its new MRR every month. Considering it can easily take 12+ months to recover new customer acquisition costs this business requires much more cash to grow than a comparable business with a higher SaaS Quick Ratio.
How do you fix a low SaaS Quick Ratio? If your company has a strong MRR growth rate but a low SaaS Quick Ratio you need to prioritize customer retention. Leverage marketing support throughout the user experience to continue to engage and educate customers and, when your company experiences churn, address the underlying issues.
If you have a good SaaS Quick Ratio, make sure you educate your investors about it. It will come in handy when you are competing for follow-on funding.