{
  "slug": "saas-rule-of-40",
  "title": "Rule of 40 Calculator",
  "heading": "Rule of 40 Calculator",
  "category": "financial",
  "url": "https://www.revenuelab.fyi/toolbox/saas-rule-of-40",
  "summary": "Combine growth rate and profit margin into the benchmark investors actually use.",
  "description": "The Rule of 40 says a healthy software business's revenue growth rate plus its profit margin should total at least 40. It exists because growth and profitability are tradeable — burning to grow fast is fine, and growing slowly while highly profitable is fine, but doing neither well is not. This calculator computes your score on both an EBITDA and a free-cash-flow basis, shows the growth rate you'd need at your current margin to clear 40, and the margin you'd need at your current growth. It's a blunt instrument at sub-$5M revenue, where growth rates are volatile, but it's the first slide in most growth-equity diligence decks.",
  "formula": "Score = YoY revenue growth % + profit margin %. Growth needed = 40 − margin. Margin needed = 40 − growth.",
  "dateModified": "2026-08-25",
  "run_url": "https://www.revenuelab.fyi/api/public/calc?tool=saas-rule-of-40",
  "inputs": [
    {
      "id": "revNow",
      "label": "Current-year revenue",
      "kind": "number",
      "hint": null,
      "default": 6400000,
      "unit": "$",
      "min": 1,
      "max": null
    },
    {
      "id": "revPrior",
      "label": "Prior-year revenue",
      "kind": "number",
      "hint": null,
      "default": 4600000,
      "unit": "$",
      "min": 1,
      "max": null
    },
    {
      "id": "ebitda",
      "label": "EBITDA",
      "kind": "number",
      "hint": "Negative if burning",
      "default": -520000,
      "unit": "$",
      "min": null,
      "max": null
    },
    {
      "id": "fcf",
      "label": "Free cash flow",
      "kind": "number",
      "hint": null,
      "default": -260000,
      "unit": "$",
      "min": null,
      "max": null
    }
  ],
  "outputs": [
    {
      "id": "score",
      "label": "Rule of 40 score (EBITDA basis)",
      "format": "decimal",
      "hint": null,
      "primary": true
    },
    {
      "id": "fcfScore",
      "label": "Score on free-cash-flow basis",
      "format": "decimal",
      "hint": null,
      "primary": false
    },
    {
      "id": "growth",
      "label": "YoY revenue growth",
      "format": "percent",
      "hint": null,
      "primary": false
    },
    {
      "id": "ebitdaMargin",
      "label": "EBITDA margin",
      "format": "percent",
      "hint": null,
      "primary": false
    },
    {
      "id": "growthNeeded",
      "label": "Extra growth points needed to reach 40",
      "format": "decimal",
      "hint": null,
      "primary": false
    },
    {
      "id": "marginNeeded",
      "label": "Margin needed at current growth",
      "format": "percent",
      "hint": null,
      "primary": false
    }
  ],
  "worked_example": {
    "inputs": [
      "Current-year revenue: 6400000 $",
      "Prior-year revenue: 4600000 $",
      "EBITDA: -520000 $",
      "Free cash flow: -260000 $"
    ],
    "outputs": [
      "Rule of 40 score (EBITDA basis): 31",
      "Score on free-cash-flow basis: 35.1",
      "YoY revenue growth: 39.1%",
      "EBITDA margin: -8.1%",
      "Extra growth points needed to reach 40: 9",
      "Margin needed at current growth: 0.9%"
    ]
  },
  "how_to": {
    "title": "How to use this",
    "steps": [
      "Enter current-year revenue ($).",
      "Enter prior-year revenue ($).",
      "Enter ebitda ($) — Negative if burning.",
      "Enter free cash flow ($).",
      "Read your rule of 40 score (ebitda basis) on the right — it updates as you type.",
      "Hit Share to keep the scenario or send it to someone."
    ]
  },
  "scenarios": [
    {
      "name": "Conservative",
      "description": "Lower-end numbers — what if things land soft?",
      "values": {
        "revNow": 3850000,
        "revPrior": 2750000,
        "ebitda": -310000,
        "fcf": -160000
      }
    },
    {
      "name": "Typical",
      "description": "Defaults — the most common real-world setup.",
      "values": {
        "revNow": 6400000,
        "revPrior": 4600000,
        "ebitda": -520000,
        "fcf": -260000
      }
    },
    {
      "name": "Ambitious",
      "description": "Higher-end numbers — what if things really pop?",
      "values": {
        "revNow": 10250000,
        "revPrior": 7350000,
        "ebitda": -830000,
        "fcf": -420000
      }
    }
  ],
  "limitations": [
    "Results are estimates before tax, fees, and inflation unless an input explicitly covers them.",
    "Rates are treated as fixed for the whole period — variable-rate products will drift from this projection.",
    "This is educational maths, not financial advice. Check anything contractual with the lender or your accountant."
  ],
  "faq": [
    {
      "q": "Which profit measure should I use?",
      "a": "EBITDA is the most commonly quoted, free cash flow is the most honest for a company with heavy capitalised development or big prepaid contracts. Report both and expect an investor to ask for the FCF version."
    },
    {
      "q": "Does the rule apply below $10M ARR?",
      "a": "Loosely. Early companies routinely score 60+ on hypergrowth or deeply negative during a build year, and neither tells you much. It becomes a genuinely useful benchmark somewhere around $10-20M ARR where growth rates stabilise."
    },
    {
      "q": "Is a score well above 40 a problem?",
      "a": "It can indicate underinvestment — a 25% grower at 40% margin scores 65 but may be leaving market share on the table in a land-grab category. Investors read very high scores as either an exceptional business or a timid one."
    },
    {
      "q": "Should I use ARR or GAAP revenue?",
      "a": "Use GAAP revenue for the margin side so it matches the P&L, and be consistent on the growth side. Mixing ARR growth with GAAP margin overstates the score for any company with meaningful services revenue or mid-year contract starts."
    }
  ],
  "related": [
    "https://www.revenuelab.fyi/toolbox/saas-magic-number",
    "https://www.revenuelab.fyi/toolbox/saas-net-revenue-retention",
    "https://www.revenuelab.fyi/toolbox/saas-burn-multiple"
  ],
  "license": "CC-BY-4.0",
  "citation": "RevenueLab — Rule of 40 Calculator (https://www.revenuelab.fyi/toolbox/saas-rule-of-40)"
}