The Proper Use of the SaaS Quick Ratio

SaaS Quick Ratio

The Proper Use of the SaaS Quick Ratio

You work hard to land new customers, but then you see your revenue growth slip away through customer downgrades and churn.  Enter the SaaS Quick Ratio.

Different than the SaaS Magic Number which measures the efficiency of your recognized revenue growth against your sales and marketing spend, the SaaS Quick Ratio measures the direction of your bookings growth.  I purposefully used the word “direction” versus “efficiency.”

Efficient or Directional?

I see the word “efficiency” used a lot in SaaS Quick Ratio articles.  At a macro level, maybe, yes, you could say your company is efficient in bookings growth.  It depends on how you are defining efficient.  I would classify this metric as directional – what is our net inflow or outflow of bookings?

However, I think in terms of financial efficiency, and the SaaS Quick Ratio does not measure the ROI efficiency of your bookings acquisition.  Your CAC could be way out of line to acquire new MRR or ARR, you could have way too many CSM’s assigned to existing customers, but you would NOT know that with this metric.

SaaS Quick Ratio Formula

The SaaS Quick Ratio measures bookings growth versus bookings contraction.  I live in the ARR world so, my calculation is not based on revenue but bookings for the month that I am measuring.  If you bill monthly (MRR), your MRR will typically equal bookings.

SaaS Quick Ratio Formula

Why the SaaS Quick Ratio is Important

MRR or ARR is everything to a subscription business.  It keeps you going, so you need to know each month if you are net positive (recurring revenue will continue to increase) or net negative (expect recurring revenue to decrease).

Be careful, though, because the SaaS Quick Ratio will not pinpoint your problem but only identify that you have a good or bad ratio of new MRR versus lost MRR.  Based on the table below, you must either take massive action to fix your business, make small tweaks, or keep a good thing going.

SaaS Quick Ratio Table

Guideline (per Social Capital’s Mamoon Hamid)

SaaS Quick Ratio < 1: You’re dead. You could sustain a Quick Ratio of less than 1 for a month or two if you already have a good customer base, but anything longer and your churn is going to kill your company.

1 < Quick Ratio < 4: You’re growing, and the growth might look good, but you are making it more difficult for yourself as you must constantly keep up high levels of customer acquisition to replace lost bookings. You will grow, but slowly, and less efficiently.

Quick Ratio > 4: You’re growing at a good rate, and doing it efficiently.  Hamid won’t invest in a SaaS company with a Quick Ratio below 4. This means that a SaaS company must be adding $4 of revenue for every $1 it’s losing for investors to even start looking favorably upon it.

Conclusion

Implement this measure for your founder or CEO so that at a quick glance they can see where your MRR or ARR is headed from month-to-month.  It also gets you in the good habit of tracking your bookings in detail.

To download the formula in Excel, please enter your valid email below (no spam) for the instant download.  I’ll keep you updated on future SaaS Excel models.

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