Rule of 40 Calculator

How to Use the Calculator – Step-by-Step

1. Enter Last Year’s Revenue (₹):
   Input your total revenue from the most recent year.

2. Enter Previous Year Revenue (₹):
   Enter your revenue from the year before last to calculate year-over-year growth.

3. Enter EBITDA for Last Year (₹):
   Input your EBITDA from the last year to assess profitability.

4. Click ‘Calculate’:
   Get your Year on Year Revenue Growth, EBITDA Margin, and Rule of 40 score.

Tip: Aim for a Rule of 40 score of 40% or above for balanced growth and profitability.

Understanding the Rule of 40

The Rule of 40 is a financial benchmark used to measure the health of a SaaS or high-growth business. If your company has a combined growth rate and EBITDA margin of more than 40%, it indicates a strong balance between growth and profitability. This can be a sign of a sustainable business model that’s attractive to investors.

Industry Benchmarks for Rule of 40

Note: Benchmarks vary depending on business models, growth rates, and market maturity.

Practical Example

Scenario:

A SaaS company has the following metrics:

• Last Year’s Revenue: ₹50,00,000

• Previous Year Revenue: ₹40,00,000

• EBITDA for Last Year: ₹7,50,000

Calculation:

• Year on Year Revenue Growth (%):
  (50,00,000−40,00,000/40,00,000)×100=25%
• EBITDA Margin (%):
  (7,50,000/50,00,000)×100=15%
• Rule of 40 (%):
  25% + 15% = 40%

Interpretation:

This company has a Rule of 40 score of 40%, indicating a balanced combination of growth and profitability.

Tips to Improve the Rule of 40 Score

• Increase Revenue Growth:
  Focus on expanding customer acquisition, developing effective pricing strategies, and implementing targeted upselling efforts.

• Improve Profitability:
  Enhance operational efficiency, minimize overhead costs, and boost margins.

• Focus on Long-Term Growth:
  Sustainable growth in revenue and profitability will improve the Rule of 40 score over time.