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Rule of 40 calculator
Growth rate plus profit margin. A single number for the trade-off between growing fast and making money, and a convention rather than a law — which matters, because it is quoted as though it were physics.
Growth in recurring revenue against the same period last year. Use ARR growth for a subscription business rather than total revenue, which services work can distort.
Usually free cash flow margin or EBITDA margin. State which one you used — the two can differ by tens of points, and the choice moves the score more than most operating decisions do.
RULE OF 40 SCORE
35.0
20–40 — below the convention
Common and not alarming on its own, particularly for a company deliberately investing ahead of revenue. Worth reading alongside the trend: rising towards 40 and falling away from it are very different stories at the same score.
The formula
Rule of 40 = revenue growth rate (%) + profit margin (%)
Published because a calculator that hides its arithmetic is asking to be trusted rather than checked. Every input above is defined precisely in the note under its field — most disagreements about these numbers turn out to be disagreements about what went into them.
WHERE THIS FAILS
It is a convention, not a finding. The number 40 was a rule of thumb that became a benchmark through repetition — there is no measured optimum at 40 rather than 35 or 45.
It treats a point of growth and a point of margin as interchangeable, and they are not. Growth compounds; a point of margin does not, which makes two companies with identical scores genuinely different businesses.
The margin definition is unstated in most quoted figures. EBITDA margin, free cash flow margin and operating margin can differ by tens of points, so two Rule of 40 scores are frequently not comparable.
It is close to meaningless below a certain scale. At very early revenue, growth rates are arithmetically large and the score says more about the small denominator than about the business.
DEFINITIONS USED HERE
OTHER CALCULATORS
- Pipeline coveragePipeline coverage = open pipeline ÷ quota for the period
- Payback periodCAC payback (months) = CAC ÷ (monthly ARPA × gross margin)
- Net revenue retentionNRR = (starting ARR + expansion − contraction − churn) ÷ starting ARR
- LTV:CAC ratioLTV = (monthly ARPA × gross margin) ÷ monthly churn rate · Ratio = LTV ÷ CAC
- Ramp-adjusted capacityCapacity = (ramped reps × quota × period/12) + (ramping reps × quota × productive months/12), where a linearly ramping rep averages half productivity during ramp
- Forecast accuracyAccuracy = 1 − |actual − forecast| ÷ actual · Bias = (forecast − actual) ÷ actual
- Magic numberMagic number = (current quarter ARR − prior quarter ARR) × 4 ÷ prior quarter S&M spend
Run the whole audit, not one number
These calculators each answer one question. The courses here build the full picture — inventory, process, measurement — with interactive tools that keep your data and export it as a workbook.
COMMON QUESTIONS
- What is the Rule of 40?
- Revenue growth rate plus profit margin should be at least 40. It exists to express a trade-off: a company growing at 60% can reasonably lose money, and a company growing at 10% should be profitable. The number itself is a convention that became a benchmark through repetition rather than a measured threshold, which is worth remembering when it is quoted as though it were a law.
- Which margin should the Rule of 40 use?
- Free cash flow margin is the most common in public-market usage, with EBITDA margin a frequent substitute. The important thing is to state which one you used, because they can differ by tens of points and a score computed on the more generous of the two is not comparable to one computed on the stricter. A Rule of 40 figure quoted without its margin basis is not interpretable.
- Does the Rule of 40 apply to small companies?
- Poorly. Early-stage growth rates are arithmetically large because the denominator is small, so a company going from $1m to $3m scores 200 on growth alone while telling you very little. The rule becomes informative somewhere around the point where growth rates fall into a range where a point of margin is a comparable trade, typically well into double-digit millions of revenue.
- Is a high Rule of 40 score always good?
- Not automatically. A score of 70 carried entirely by margin, with growth near zero, describes a profitable business that has stopped growing — which is a real outcome but not the one the rule is usually invoked to praise. Read the composition, not just the total.