The SaaS Quick Ratio measures how "efficient" your revenue growth is.
Not all growth is created equal —and even though two companies can have the exact same revenue or customer growth rate, the underlying elements of that growth are often more indicative of company health.
To not bury the lede, a higher Quick Ratio ratio is good —and means your growth is healthy. A lower Quick Ratio is not as good, and means you'll have to work even harder in the longer term.
Let's dive in.
Calculating your Quick Ratio:
Quick Ratio = (New MRR + Expansion MRR) / (Contraction MRR + Churned MRR)
Growth is made up of a few components:
- New revenue
- Expansionary revenue (upgrades and downgrade)
- Churned revenue
With any recurring revenue business, the latter two often lead to compounding gains and are often less expensive from a CAC perspective.
In that vein, The idea is that MRR growth, or the growth rate of a company, is not enough to gauge the health of the company. The makeup of that growth is equally important.
Let's say two companies each grow by $25,000 in a given month.
Company A can have $50K in New and Upgrades, while losing 25k to Downgrades and Churn. They have a quick ratio of 2.
Company B can have only 30k in New and Upgrades, but lose $5k in Downgrades and Churn. They have a quick ratio of 6.
Company B's growth rate is much more efficient in the long run.