SaaS quick ratio
The SaaS quick ratio divides MRR added (new plus expansion) by MRR lost (churn plus contraction). Mamoon Hamid suggests 4 or higher is healthy.
The SaaS quick ratio measures growth efficiency: for each dollar of recurring revenue you lose, how many do you add? It was coined by Mamoon Hamid of Social Capital at SaaStr Annual, and he describes it in his SaaStr talk as new revenue plus expansion revenue divided by lost or contracted revenue.
It is not the accounting quick ratio, also called the acid-test ratio. That one compares liquid assets such as cash and receivables with current liabilities, and tells you whether a company can pay its short-term bills. The SaaS version has nothing to do with the balance sheet. It only shares the name.
How to calculate it
This is the formula in Tomasz Tunguz's post on the optimal quick ratio. In a month, you add $3,000 of new MRR and $1,000 of expansion MRR. You lose $800 to cancellations and $200 to downgrades. The ratio is (3,000 + 1,000) / (800 + 200) = 4.0. For every four dollars added, you lose one.
A second month: $2,000 new, $500 expansion, $1,000 churned and $250 contraction gives 2,500 / 1,250 = 2.0. You are still growing, at a much higher cost in effort.
What good looks like
Hamid proposed 4 as the level worth investing in, and below that, approaching 2 or 1, he calls it a leaky bucket that needs ever more spending to keep growing. Treat it as a guide, not a law. Tunguz shows what 4 implies: a company growing 15% a month can tolerate 5% monthly churn, which is about 46% a year, and he calls levels like that unsustainable. In his data from Totango, most companies with low annual churn show ratios far above 4, so a ratio of 4 can still hide a lot of loss.
Where it misleads
- It rewards growth. A very fast month of new sales raises the ratio even when churn is bad. Tunguz warns that high growth rates can mask high dollar churn. Check revenue churn alongside it.
- It is volatile at small scale. One $500 cancellation in a $10,000 MRR business can move the ratio by a full point. Use three or six months of data.
- It falls as you mature. Growth slows while churn stays, so a ratio of 4 is harder for an older business. It is a stage-dependent check.
- It ignores cost. Buying growth with ads and discounts counts the same as organic growth. Pair it with CAC payback.
For small and bootstrapped SaaS
The ratio is a good sanity check when you grow slowly, since it shows whether your retention or your sales is the bottleneck. A flat-rate product with low churn and few new customers can score above 4 and still be tiny. Look at it with MRR growth rate: a healthy ratio and a low growth rate means you need more top of funnel. A low ratio at any growth rate means you need to plug the leak first.