Quick Ratio (SaaS)

Total growth can hide a leak. Two businesses can both grow by €20,000 a month, one by gaining €25,000 and losing €5,000, the other by gaining €100,000 and losing €80,000. The second is spending far more to stand still, and a rough month of cancellations could tip it into decline. The quick ratio exposes that: 5 for the first, 1.25 for the second.

A ratio of 4 is often quoted as a sign of efficient growth. Treat it as a guide, since the right level depends on the stage of the business.

1. Fix the definitions. Use monthly recurring revenue for all four components: new, expansion, churned and downgraded. Write down how each is counted, for example whether a reactivated customer counts as new or as expansion, and keep the rule.
2. Calculate it every month. Divide new plus expansion by churned plus downgraded for the same month, and plot the last six to twelve months. One month can mislead, particularly in a small business where a single customer swings the result.
3. Check which side moved. When the ratio falls, find out whether new and expansion revenue dropped or whether churn and downgrades rose. The fixes are different.
4. Look at the cause. If the loss side rose, group the lost revenue by customer age, plan and source. If the gain side dropped, look at the pipeline and at upgrade rates.
5. Act below about 2. Look at retention and plan fit before spending more on acquisition, because more spend into a leaking base just refills the leak.
6. Pair it with NRR. Quick ratio includes new customers, so read net revenue retention beside it to see how the existing base behaves alone.

Quick ratio is:

(new revenue + expansion revenue) divided by (churned revenue + downgraded revenue)

all measured as monthly recurring revenue over the same period. If a business adds €30,000 from new customers and €10,000 from upgrades, and loses €15,000 to cancellations and €5,000 to downgrades, the ratio is 40 divided by 20, which is 2.

It shares a name with the accounting quick ratio, which measures whether a company can pay short-term bills. They are unrelated. This one is a growth-quality measure.

• Mixing annual and monthly figures.
• Leaving out downgrades, which makes the ratio look better than it is.
• Reading a single month, particularly in a small business where one customer swings the result.