Rule of 40 Calculator

The Rule of 40 is the single most quoted health check for a software business, and this calculator works it out in seconds. The rule states that a healthy SaaS company's revenue growth rate plus its profit margin should add up to at least 40 percent. The logic is elegant: early-stage companies are expected to grow fast even while losing money, mature companies are expected to be highly profitable even as growth slows, and the sum of the two is what matters. A business growing 60 percent a year while burning enough to run at a minus 20 percent margin still clears the bar, and so does one growing a modest 10 percent at a 30 percent margin. Investors and boards use it to judge whether a company is balancing growth and profitability sensibly, or chasing growth at any cost. This calculator adds your two figures and tells you instantly whether you pass. You enter your year-on-year revenue growth rate as a percentage and your profit margin, which can be operating margin, EBITDA margin or free cash flow margin depending on the convention you follow, and the calculator returns the combined Rule of 40 score, your two inputs, and a clear pass or below-benchmark verdict. The results update as you type, so you can model how improving growth or margin moves the score. Use it to benchmark your business, to prepare for fundraising, or to set targets that trade off growth and profit. A score well above 40 signals an efficient, attractive business; below 40 suggests you are either not growing fast enough for the money you are spending, or not profitable enough for your growth rate. Use a consistent margin definition so the comparison is fair over time.

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45%
Rule of 40 score
Growth25%
Margin20%
VerdictPass

Rule of 40 = growth rate + profit margin. 40% or more is the benchmark. Use a consistent margin definition (operating, EBITDA or free cash flow). A guide, not investment advice.

How it works

The Rule of 40 simply adds your revenue growth rate to your profit margin, both as percentages. If the total is 40 or more, the business is considered to be balancing growth and profitability well. A fast grower can have a negative margin and still pass, while a slow grower needs strong profitability to clear the bar.

Worked example

A SaaS company growing revenue 25 percent a year at a 20 percent profit margin has a Rule of 40 score of 25 plus 20, which is 45 percent. That clears the 40 percent benchmark, suggesting a healthy balance of growth and profit. If growth slowed to 10 percent, the margin would need to reach 30 percent to keep passing.

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Frequently asked questions

What is the Rule of 40?

It is a SaaS benchmark stating that a company's revenue growth rate plus its profit margin should total at least 40 percent. It balances the two: fast growers can run at a loss and still pass, while slower growers need strong profitability to clear the bar.

Which margin should I use?

Commonly operating margin, EBITDA margin or free cash flow margin. There is no single rule, so pick the one your business or investors use and apply it consistently. Free cash flow margin is popular because it reflects real cash generation.

Is a higher Rule of 40 score always better?

Generally yes, a higher score signals a more efficient business. But the mix matters too: investors weigh how the score is achieved, since durable growth and sustainable margins are viewed more favourably than a score propped up by one-off effects.