SaaS Quick Ratio — Measuring growth efficiency
Customer Success Manager
Finance and Accounting
Jun 19, 2022
We’ve talked about net retention rate and its importance, but even a company with perfect net retention cannot succeed without a strong MRR. Focusing solely on net retention rate is, in a sense, putting the cart before the horse. While the growth of a company is significantly impacted by what percent of its revenue it can retain from existing customers, that means nothing if the revenue generation itself is lacking. As such, net retention rate on its own can become a misleading statistic with regards to the success of your startup.
The SaaS Quick Ratio
To solve this problem, we turn to the SaaS quick ratio. The SaaS Quick Ratio compares your company’s new MRR with its lost MRR, allowing for easy analysis of your company’s efficiency while effectively showing the company’s MRR growth. However, just like net retention rate, this statistic can become misleading. A strong SaaS Quick Ratio does not correlate with efficiency. A strong SaaS Quick Ratio without a high net retention rate means that although your company is growing steadily, it’s not performing at its maximum potential.
Calculating the SaaS Quick Ratio
SaaS Quick Ratio = (New MRR + Expansion MRR) / (Lost MRR + Churn MRR)
What does the SaaS Quick Ratio mean?
Now that you have your SaaS Quick Ratio, you need to evaluate the ratio and apply it to your company. So what does your SaaS Quick Ratio imply? There are three main tiers of evaluating SaaS Quick Ratios.
The Low Quick Ratio — If your SaaS Quick Ratio is less than 1, this means that your company is losing MRR to downgrades and high churn rates. If this is your company, you need to take urgent action to save your company from plummeting into the abyss.
The Middle Quick Ratio — If your SaaS Quick Ratio is between 1 and 4, this means that although your startup isn’t in urgent need of repair, you’ll be in danger of increased downgrade or churn rates pushing you below a Quick Ratio of 1, which could be disastrous. This also means that even if you don’t get pushed into the Low Quick Ratio zone, building your startup is going to be even more difficult.
The High Quick Ratio — If your SaaS Quick Ratio is 4 or above, you’re doing pretty well. There shouldn’t be too much to worry about in terms of your short-term growth. Your gained MRR should be outstripping your lost MRR, allowing for stable growth.
Source: Author’s Image
An important reminder that if you have a High Quick Ratio, that doesn’t mean your startup’s foundations are performing well. The Quick Ratio, by its name, only forecasts quick, or short-term growth. Your Quick Ratio could be high enough that it obscures a high lost MRR, and if left unaddressed, could lead to long term problems.
About the Author
Alex is the co-founder and CEO of Truewind, an AI-powered bookkeeping and finance solution. The company has raised over $3 million from investors including Y Combinator and Fin Capital, and serves dozens of customers. Alex is a 2x founder, a recovering venture capitalist, and a reminiscent aerospace engineer. He likes (winning at) basketball and poker.