How to calculate the SaaS rule of 40 in Excel and Google Sheets

Step by step

1. 1In row 1, enter prior period revenue in B1. In row 2, enter current period revenue in B2.
2. 2In cell C2, enter the profit margin percentage for the current period. Use EBITDA margin, free cash flow margin, or operating margin — be consistent. Enter as a plain number (e.g. -5 for −5%).
3. 3Revenue growth rate = (B2−B1)/B1 × 100. This gives a percentage (e.g. 45 for 45% growth).
4. 4Rule of 40 score = Growth Rate + Profit Margin: =((B2-B1)/B1*100)+C2.
5. 5Compare the result to 40. A score ≥ 40 is the benchmark; ≥ 60 is exceptional ('Rule of 60').

Tips

• The profit margin input can be EBITDA margin, free cash flow margin, or net income margin — choose one and document it. EBITDA margin is the most common choice for private SaaS companies.
• A company growing 80% with −45% profit margin still scores 35 — below 40. Use this as a prompt to model the path to improving the combined score as growth moderates.
• The Rule of 40 is most reliable above $50M ARR. At very early stages, growth rates are extremely high (diluting the margin signal) or extremely low (hiding a bad margin with a small sample).

Frequently asked