Tool
Rule of 40 Calculator
Add your growth rate and profit margin. 40 or higher is the benchmark for a healthy software business.
Results
- Combined score
- 45.0
- Rule of 40
- Passes ✓
Growth rate + profit margin ≥ 40 signals a healthy balance of growth and profitability for a software business.
A worked example — your numbers
Your score = growth + margin = 25.0% + 20.0% = 45.0.
That's at or above 40, so this business passes the Rule of 40.
How to read your result
The rule says fast growth justifies thin or negative margins, and strong margins justify slower growth — but the two together should clear 40. At 45.0 you've struck that balance.
It's a SaaS-specific signal, not a verdict — read it alongside churn, LTV:CAC, and runway.
This calculator provides directional estimates for informational purposes only and is not tax, legal, or financial advice. Results depend on the inputs you provide. For advice specific to your situation, book a Discovery Meet.
What this calculator does
The Rule of 40 is a quick health check for software and subscription businesses: your revenue growth rate plus your profit margin should add up to at least 40. This tool adds the two and tells you whether you clear the bar. It's built for founders and operators balancing the eternal tension between growing fast and being profitable.
How it works
Add your year-over-year revenue growth rate (as a percent) to your profit margin (EBITDA or free-cash-flow margin, as a percent). If the sum is 40 or more, you pass.
The logic: high growth justifies thin or negative margins, and high margins justify slower growth — but the combination should clear 40. A company growing 25% with a 20% margin scores 45 and passes; one growing 10% with a 5% margin scores 15 and doesn't.
Common mistakes
- ·Mixing margin definitions. Decide on EBITDA or FCF margin and use it consistently when tracking the score over time.
- ·Applying it to the wrong business. It was built for SaaS/subscription companies; it's a poor fit for, say, a services firm or early pre-revenue startup.
- ·Chasing the score over the business. The number is a diagnostic, not a target to game — sustainable growth and real cash generation matter more than hitting exactly 40.
Frequently asked questions
What is the Rule of 40?+
A benchmark for software companies stating that revenue growth rate plus profit margin should total at least 40%. It captures the trade-off between growing fast and being profitable in a single number.
Which profit margin should I use?+
Most commonly EBITDA margin or free-cash-flow margin. Either works — just be consistent. Net margin can also be used but is less standard. The key is using the same definition each time you measure.
Does the Rule of 40 apply to my business?+
It's designed for recurring-revenue software and subscription businesses. For services firms, retail, or other models, other health metrics are more meaningful. Treat it as a SaaS-specific rule of thumb.
Is passing the Rule of 40 enough?+
It's a useful signal but not a complete picture. Cash position, churn, unit economics, and market opportunity all matter. Use it alongside metrics like LTV:CAC and runway, not on its own.
Want a real answer, not just a calculator?
A calculator gives you a directional number. A free Discovery Meet gives you a CPA who reviews your actual books, structure, and goals.
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