For Software as a Service ( SaaS ) companies, the “ Rule of 40 ” has become a critical metric for assessing financial health and growth potential.
But what exactly is it, and how can it help you steer your business to success?
What is the “Rule of 40”?
The “ Rule of 40 ” is a rule of thumb used by investors and SaaS company executives to measure the balance between growth and profitability.
It states that the sum of a SaaS company's annual revenue growth rate and EBITDA margin (or operating margin) should ideally be equal to or greater than 40%.
For example, a company growing at a rate of 25% per year with an EBITDA margin of 15% would meet this rule, achieving a score of 40%.
Why is it important?
The “ Rule of 40 ” provides a simple yet powerful framework for assessing the financial performance of SaaS companies. It helps strike a balance between investing in growth and maintaining sustainable profitability.
In an industry where rapid growth is often prioritized, this rule helps managers avoid the pitfalls of unprofitable expansion. It also serves as a guide for investors looking for balanced, well-managed companies.
The "Rule of 70" to see even further
The " Rule of 70 " is a more ambitious variation of the " Rule of 40 ". It is often used for companies in a high-growth phase, where the sum of the revenue growth rate and the EBITDA margin must reach or exceed 70%.
This rule applies especially to very dynamic companies, where priority is given to rapid growth while maintaining a certain level of profitability. Although more demanding, it allows companies to set high goals to maximize their potential on the market.
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The advantages for SaaS
For SaaS companies, applying the “ Rule of 40 ” and, for some, the “ Rule of 70 ” can bring several benefits:
Balance
It helps maintain a balance between growth and profitability, avoiding excesses that could harm long-term financial health.
Attractiveness for investors
A company that respects the " Rule of 40 " is often perceived as more stable and promising, thus attracting capital more easily.
Strategic management
This indicator allows managers to prioritize investments and make informed decisions regarding expansion or cost reduction.
How Blendy supports you
At Blendy, international accounting firm specializing in Pennylane & QuickBooks , we offer digital and SaaS companies personalized support to help them measure and optimize their financial performance.
With accounting tools like Pennylane or QuickBooks, we provide rigorous, real-time financial management, allowing them to track their growth and profitability with precision.
And the “ Rule of 40 ” is one of the key metrics we encourage our SaaS customers to consistently follow. Our team of experts advises them on the best strategies to meet or exceed this rule, while maintaining a healthy balance between investing in growth and profitability.
Whether you're preparing for a fundraising round or adjusting your operations, Blendy is here to help you navigate financial complexities and ensure the sustainability of your SaaS business.
As you can see, the " Rule of 40 " and the "Rule of 70" are more than just indicators. They are strategic tools that help guide SaaS companies towards balanced and sustainable growth.
By collaborating with Blendy , international accountant based in Paris , you benefit from the expertise necessary to implement this rule in your daily financial management, thus optimizing your overall performance and strengthening your attractiveness to investors.
With Blendy, International accountant based in Paris France, take advantage of digital accounting and tailor-made advice to accelerate your financial process and develop your business.
Pennylane, Dext, QuickBooks and Stripe certified, we support digital and It companies, e-Commerce, SaaS in France and internationally.