Yusuf Bayrak
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    Rule of 40 Calculator

    The Rule of 40 says a healthy SaaS company's growth rate plus profit margin should be at least 40. Enter your annual revenue growth rate and profit margin to see your score and whether you pass.

    //Calculator
    // Rule of 40 Score
    0.0
    Rule of 40 = Growth Rate % + Profit Margin %
    // Status
    Fail — below 40

    // Use EBITDA or free cash flow margin and keep the same measure across periods. If you are burning cash, enter a negative margin (e.g. -20).

    //Guide

    What is the Rule of 40?

    The Rule of 40 compresses SaaS health into one number: Annual Revenue Growth Rate (%) + Profit Margin (%) ≥ 40. The logic is that a fast-growing company is allowed to burn cash in the short term, while a slower-growing company is expected to be profitable. Below 40 the company is neither growing fast enough nor running efficiently enough.

    Worked example

    A company growing ARR 55% while running a −20% free cash flow margin scores 55 + (−20) = 35, which fails the rule. A company growing 18% with a 25% profit margin scores 43 and passes. Investors generally treat those two very different profiles — aggressive growth or disciplined profitability — as equivalent when the score is the same.

    Which profit margin should you use?

    Three measures are common: EBITDA margin, free cash flow (FCF) margin or operating margin. Whichever you pick, stay consistent between periods; switching the measure to flatter the score is the most frequent mistake. On the growth side use ARR or annualised revenue growth — plugging in a monthly growth rate inflates the score artificially.

    The Rule of 40 is a balance test, not a strategy. Scoring above 40 does not guarantee sustainable unit economics, so read it next to NRR, LTV:CAC and CAC payback. In early-stage companies (under $1M ARR) the small base makes growth percentages huge and the score misleading.

    //Frequently Asked Questions

    What is the Rule of 40 and how is it calculated?

    Rule of 40 = Annual Revenue Growth Rate (%) + Profit Margin (%). A total of 40 or above is considered a healthy balance of growth and profitability. Example: 30% growth + 12% profit margin = 42, which passes.

    Which profit margin belongs in the Rule of 40?

    EBITDA margin and free cash flow margin are the most widely used; operating margin is also accepted. The key is applying the same measure consistently across periods, otherwise the trend is not comparable.

    Which companies is the Rule of 40 meaningful for?

    Typically companies past roughly $1M ARR whose growth rate has started to stabilise. Very early stage growth percentages are inflated by a tiny base, so the score does not reflect real health.

    What should I do if my score is below 40?

    Identify the weak component first. If growth is low, work on pricing, expansion revenue (NRR) and acquisition channels; if profitability is low, work on gross margin, infrastructure cost and sales efficiency (CAC payback). Pushing both at once usually breaks both.

    How do the Rule of 40 and NRR relate?

    High NRR is the cheapest source of growth: expansion revenue from existing accounts carries little acquisition cost, so it lifts the growth and margin components at the same time. Improving NRR is usually the most efficient way to raise a Rule of 40 score.

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