SaaS Quick Ratio

What is SaaS Quick Ratio?

An often overlooked metric by early stage entrepreneurs and investors is the SaaS Quick Ratio, used to measure the growth efficiency of a company. Another way to think of it is as a health measure of company growth.

Benchmark

Early stage companies with a ratio of 4 or higher are considered healthy. This will become more difficult to maintain with growth. However, at a SaaS Quick Ratio of 2, you are loosing half of your new MRR every month.

How to calculate SaaS Quick Ratio

ƒ (New MRR + Expansion MRR) / (Churn MRR + Reduction MRR)

Favourable trend

Up is positive

Level of complexity

Intermediate

Date created: Feb 24, 2019

Latest update: Apr 14, 2019

Contributor:  Susan Richards

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 a host of metrics that may really only be loosely correlated to sound financial performance. As a result, early stage SaaS entrepreneurs are often forced into distraction in order to keep pace with the vanity metrics of their competitors if they want to continue to achieve follow on funding.

The SaaS Quick Ratio is calculated by dividing MRR added by MRR lost.

The higher the ratio the better. Early stage companies are generally considered to be fairly healthy with a 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 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 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.