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Rule of 40 Calculator

Calculate your Rule of 40 score from revenue growth plus EBITDA, free cash flow or net margin, and see exactly what it would take to reach 40.

39.6
Rule of 40 score
30.0%
YoY revenue growth
9.6%
Chosen margin
0.4
Points short of 40
$2,500,000
EBITDA
9.6%
EBITDA margin
$2,400,000
Free cash flow
9.2%
FCF margin

39.6 — In the 30s — close, and usually fixable with either a few points of growth or a round of cost discipline.

What would get you to 40

At 30.0% growth you would need a 10.0% margin to hit 40.

At a 9.6% margin you would need 30.4% growth to hit 40, which on $20,000,000 of prior-year revenue means $26,076,923 this year.

Rule of 40 = YoY revenue growth % + profitability margin %  ·  EBITDA = operating income + depreciation + amortisation  ·  FCF = cash from operations − capex

Worked example: revenue up from $20,000,000 to $26,000,000 is 30% growth. With $2,500,000 of EBITDA on $26,000,000 of revenue the margin is 9.6%, so the score is 39.6 — just under the bar.

The Rule of 40 is a rule of thumb, not an accounting standard, and the answer changes a lot depending on which margin you pick — which is why the measure is a dropdown here rather than a hardcoded choice. EBITDA flatters companies with heavy capitalised development costs; free cash flow is the harder test. The rule also assumes a subscription-style revenue base and tells you very little about a company below roughly $10,000,000 of revenue, where a single large deal swings growth by tens of points. All calculations run locally in your browser.

What is the Rule of 40 Calculator?

The Rule of 40 says a healthy software business should have its year-on-year revenue growth rate and its profit margin add up to at least forty.

  • Three margin bases — EBITDA, free cash flow and net income — in one dropdown
  • EBITDA and free cash flow computed from raw inputs, not entered as percentages
  • Score, growth rate, chosen margin and the gap to 40 in one stat row
  • Inverse solve: the margin needed at your growth, and the growth needed at your margin
  • Colour-coded verdict bands from under 30 to 60-plus
  • Runs entirely in your browser — nothing uploaded or stored

How to use the Rule of 40 Calculator

  1. 1

    Choose a currency and the profitability measure you want to score against.

  2. 2

    Enter prior-year and current-year revenue to set the growth half of the score.

  3. 3

    Fill in operating income, depreciation and amortisation for the EBITDA margin.

  4. 4

    Add net income, cash from operations and capex to enable the net and free cash flow margins.

  5. 5

    Read the score and the gap to 40, then check the trade-off panel for what would close it.

About the Rule of 40 Calculator

The Rule of 40 says a healthy software business should have its year-on-year revenue growth rate and its profit margin add up to at least forty. Grow at 50% and you can afford to lose 10%; grow at 10% and you need a 30% margin. This calculator computes both halves from raw figures rather than asking you to work out the margins first.

Because the answer changes a lot depending on which margin you pick, the profitability measure is a dropdown rather than a hardcoded choice. Switch between EBITDA, free cash flow and net income and watch the score move — EBITDA flatters companies with heavily capitalised development costs, while free cash flow is the much harder test.

The tool also inverts the rule, telling you what margin you would need at today's growth rate and what growth you would need at today's margin to reach forty. All of it runs in your browser; your financials are never uploaded.

Frequently asked questions

What is the Rule of 40 in SaaS?

It is a rule of thumb that a software company's annual revenue growth percentage plus its profit margin percentage should total at least 40. It exists to stop people judging growth and profitability separately, since a company can legitimately trade one for the other.

Should I use EBITDA or free cash flow margin?

Free cash flow is the stricter and more honest measure because it subtracts capital expenditure and reflects real cash. EBITDA is more commonly quoted and more forgiving, especially for companies that capitalise development spend. Investors usually want to see both, which is why this calculator switches between them.

Does the Rule of 40 apply to small startups?

Not usefully. Below roughly ten million in revenue a single large deal can swing growth by tens of percentage points, so the score bounces around meaninglessly. The rule was designed for companies at scale, and applying it to an early-stage business tends to produce false comfort or false alarm.

Is a Rule of 40 score above 40 always good?

It is a strong signal, but the mix matters. A score of 45 from 45% growth at break-even is a very different business from 45 made up of 5% growth and a 40% margin — the first is a growth story, the second is a cash machine. Look at how the score is composed, not just its total.

How is revenue growth calculated for the Rule of 40?

Year-on-year: current-year revenue minus prior-year revenue, divided by prior-year revenue, expressed as a percentage. Some companies use annualised recurring revenue instead of reported revenue, which gives a different and usually higher number — say which one you used when quoting a score.

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