Rule of 40 calculator for SaaS

What is the Rule of 40?

The Rule of 40 says a healthy software company’s revenue growth rate plus its profit margin should add up to at least 40%. It’s a way to judge growth and profitability together: a company growing fast can afford to lose money, and a company growing slowly should be making it.

Brad Feld popularized it in 2015 as a rule of thumb growth investors apply to SaaS companies at scale. It has since become a standard line in SaaS board decks and investor analyses — useful precisely because it doesn’t reward growth at any cost, or profit bought by stopping growth.

Rule of 40 formula

EBITDA margin or free cash flow margin?

Both are common, and they can differ a lot. EBITDA margin is closer to operating profitability; free cash flow margin reflects the cash actually generated, including the effect of annual prepayments (which flatter it) and capital spending (which lowers it). Pick one, say which in any report, and don’t switch between periods.

Worked example

1. A SaaS grew revenue from $4.0M to $5.2M over the last 12 months: 30% growth. Its EBITDA margin over the same period was 5%.
2. Rule of 40 score = 30 + 5 = 35. It falls short by 5 points.
3. To pass at 30% growth it needs a 10% EBITDA margin — about $260,000 more profit on $5.2M of revenue. Or, at a 5% margin, growth of 35%.
4. A second company growing 60% with a −25% margin also scores 35; one growing 15% with a 25% margin scores 40 and passes.

How many companies pass the Rule of 40? Benchmarks

Common Rule of 40 mistakes

• Mixing periods. Growth over the last 12 months and margin for one quarter don’t add up to a meaningful score. Use the same trailing 12 months for both.
• Using gross margin. The rule uses a profit margin after operating costs (EBITDA or free cash flow), not gross margin, which would make almost every software company pass.
• Applying it too early. At $300,000 of ARR, doubling is common and a single large customer swings margin; the score mostly reflects noise. It becomes informative as revenue grows and stabilizes.
• Switching profit measures. Reporting EBITDA margin one year and free cash flow margin the next can move the score by several points without anything changing.
• Counting one-off revenue as growth. A large one-time contract or a price increase that won’t repeat inflates growth for a single year.
• Treating it as the only metric. Two companies scoring 40 can be very different — one burning cash to grow, one barely growing. Look at the components, and at churn and net revenue retention.

How VisitTrack helps with the growth half

Revenue growth and margin come from your billing and accounting systems — VisitTrack doesn’t report profit. What it does show is where new revenue comes from, so you can put more into the channels that grow revenue efficiently and less into those that only add cost.

1. Connect your payment provider (revenue attribution) to see each payment attributed to the source, campaign and landing page that earned it, on the Revenue tab.
2. Compare revenue by channel with what each channel costs — the CAC calculator turns that into acquisition cost per customer.
3. Pull revenue by source into your own reporting through the API or MCP server.
4. Check how long the cash lasts while you grow with the burn rate and runway calculator.