# SaaS Quick Ratio

Guide to Understanding the SaaS Quick Ratio

• What is the definition of the SaaS quick ratio?
• What formula calculates the SaaS quick ratio?
• What does the SaaS quick ratio measure?
• What is the benchmark for a “good” SaaS quick ratio?

## SaaS Quick Ratio – Efficiency KPI Measure

The SaaS quick ratio measures a company’s growth efficiency by comparing its new revenue growth (“inflows”) to its lost revenue (“outflows”).

SaaS companies are unique in that they are not only striving for revenue growth – but also attempting to secure long-term recurring revenue sources.

Industry-specific KPIs such as the SaaS magic number can confirm if a company’s sales and marketing strategy is operating efficiently, whereas the rule of 40 can make sure the trade-off between growth and profitability is kept at reasonable levels.

The SaaS quick ratio, however, is used to demonstrate whether a company’s revenue growth is supported by sufficient customer retention, i.e. the positive revenue growth is balanced with minimal customer churn and downgrades.

## SaaS Quick Ratio Formula

Calculating the SaaS quick ratio is a relatively straightforward process. The first step is to add new monthly recurring revenue (MRR) to expansion MRR – these represent MRR growth (“inflows”).

The resulting figure is then divided by the sum of the churned MRR and contraction MRR, which are indicative of lost MRR (“outflows”).

###### SaaS Quick Ratio Formula
• SaaS Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)

The list below clarifies the meaning of each item in the formula:

• New MRR → The MRR from acquiring new customers
• Expansion MRR → The MRR derived from existing customers (e.g. upgrades to higher priced tier)
• Churned MRR → The lost MRR from customers that canceled and left
• Contraction MRR → The lost MRR from existing customers (e.g. downgrade to lower priced tier)

## Interpreting the SaaS Quick Ratio – Industry Benchmark

As a general rule, the higher the SaaS quick ratio, the more efficient the growth of the company is.

The quality of growth can dictate the long-term viability of a SaaS company, i.e. not all revenue is created equal.

A SaaS quick ratio of 4.0 is the most frequently cited target benchmark that companies aim to reach (or surpass).

If a SaaS company’s quick ratio is 4.0, that implies that for every \$4.00 in revenue generated, only \$1.00 is lost from churn or contraction.

Specifically, companies exhibiting strong revenue growth and are acquiring new customers at a rapid pace can easily become susceptible to neglecting churn and looking past internal issues.

In order for a company’s growth to someday reach a sustainable state, its customer churn must be managed and weaknesses in its business model must be addressed.

## SaaS Quick Ratio Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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## SaaS Quick Ratio Example Calculation

Suppose a SaaS company generated \$400k in new MRR in Q-1, along with \$200k in expansion MRR from successful upselling and cross-selling efforts.

• New MRR = \$400,000
• Expansion MRR = \$200,000

For the quarter, the company brought in \$600k in MRR growth (“inflows”).

• MRR Growth = \$400,000 + \$200,000 = \$600,000

In contrast, the company incurred \$100k in churned MRR from lost customers and \$50k in contraction MRR.

• Churned MRR = \$100,000
• Contraction MRR = \$50,000

The total lost MRR (“outflow”) is \$150k at the end of the quarter.

• Lost MRR = \$100,000 + \$50,000 = \$150,000

With those two inputs prepared, we’re now ready to calculate the SaaS quick ratio of our company, which comes out to 4.

• SaaS Quick Ratio = \$600,000 / \$150,000 = 4.0

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