The SaaS quick ratio measures how quickly a company grows its recurring revenue while maintaining low customer churn. This metric helps companies understand whether they are growing efficiently and sustainably.
A high SaaS quick ratio indicates that a company can generate substantial recurring revenue without incurring significant churn.
Why is this metric important?
The SaaS quick ratio is one of the most crucial financial efficiency metrics for measuring a company’s performance because it helps investors understand whether a company is growing efficiently or losing money.
If a company is growing rapidly but experiencing high churn, then it may not have enough resources to support its business growth rate. In addition, it could indicate that the company is not managing its revenue growth effectively.
However, if a company is growing slowly with little or no churn, then it may be able to expand more aggressively.
Understanding the SaaS quick ratio
The SaaS quick ratio and the finance quick ratio, or acid test ratio, can sometimes be confused for one another, even though they are two separate financial indicators.
The SaaS quick ratio solely relates to a company’s revenue growth rather than its liquidity, whereas the term “quick ratio” in Finance refers to the metric that gauges a company’s capacity to cover its short-term liabilities.
Even though both financial metrics give investors and finance leaders a snapshot of the risk associated with a company, the SaaS quick ratio is becoming more and more popular among professionals in the industry because it gives a more accurate picture of a company’s growth prospects than other metrics like MRR.
How should a SaaS quick ratio look?
The SaaS quick ratio, measures the direction of the bookings growth by calculating the monthly net inflow or net outflow of ARR or MRR.
A SaaS quick ratio of less than 1 indicates that you are losing customers faster than you are acquiring them. On the other hand, if this metric is greater than 4 it indicates that you are gaining customers faster than you are losing them. Finally, if your SaaS quick ratio is somewhere in between, you are maintaining a healthy balance.
SaaS quick ratio calculation
The SaaS quick ratio compares a business’s revenue inflows and revenue outflows.
This is one of the most critical business metrics you can use to understand how well your SaaS product is performing. You can calculate it monthly, and it requires bookings and revenue churn data as inputs.
In the numerator, we measure bookings growth from all our sources. This includes new customer bookings and expansions from existing customers.
In the denominator, we measure the contraction of bookings. This includes lost revenue from your existing customer base, compared to previous months, due to customer downgrades and churn.
