In the example below, I’m calculating my growth percentage using year-to-date (YTD) recurring revenue growth. Why use EBITDA in the rule of 40? Every company’s capital and entity structures are different as well the application of accounting principles on the capitalization of fixed or intangible assets.ĮBITDA tries to place companies on a common playing field by stripping out interest from debt, differences in taxation and accounting policies to approximate its operating cash flow. EBITDA is a rough proxy for the cash flow generated by your SaaS business.

Your SaaS business is often roughly valued on multiples of ARR, but when exiting on a larger scale or exiting from private equity ownership, EBITDA is king. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. EBITDA is a common financial metric and very important in the SaaS world. Profit Inputįor profit margin, it is common to use EBITDA margins. This services revenue stream may produce margins, but it serves to support your recurring revenue stream. With high levels of recurring revenue, you are definitely focused on growing your subscription revenue while the other revenue streams in your business most likely support the growth and retention of your recurring revenue.įor example, you may have a professional services team that implements and trains customers on your software to ensure that your customers are successful. If subscription revenue comprises 80% or more of your total revenue, I am more inclined to use recurring revenue for growth. For revenue growth, you can use either recurring revenue growth or total revenue growth.

The rule of 40 formula is growth