Understanding the SaaS Quick Ratio

The SaaS Quick Ratio is a crucial metric for evaluating the health and efficiency of a Software as a Service (SaaS) business's growth. It measures how effectively a company is growing its recurring revenue while minimizing churn.

How is it Calculated?

The Quick Ratio is calculated using four key components of recurring revenue:

• New MRR: Monthly Recurring Revenue from new customers.
• Expansion MRR: Additional MRR from existing customers (upgrades, cross-sells).
• Churned MRR: MRR lost from canceled subscriptions.
• Contraction MRR: MRR lost from existing customers (downgrades).

The formula is:

Quick Ratio = (New MRR + Expansion MRR) / (Churned MRR + Contraction MRR)

Interpreting the Results

The Quick Ratio provides insights into your company's growth efficiency:

• Ratio > 4: Excellent growth efficiency. Your company is growing rapidly with minimal churn.
• Ratio 2-4: Healthy growth. You are adding new revenue at a good pace, but there might be room to optimize churn or expansion.
• Ratio 1-2: Moderate growth. Growth is outpacing churn, but not significantly. Focus on improving retention and expansion.
• Ratio < 1: Concerning. Your churn and contraction are higher than your new and expansion revenue, indicating a shrinking business. Immediate action is needed.

Example Calculation

Let's say a SaaS company has the following figures for a month:

• New MRR: $10,000
• Expansion MRR: $5,000
• Churned MRR: $2,000
• Contraction MRR: $1,000

Using the formula:

Quick Ratio = ($10,000 + $5,000) / ($2,000 + $1,000)

Quick Ratio = $15,000 / $3,000

Quick Ratio = 5

This indicates excellent growth efficiency for the company.