# The five calculations every SaaS professional runs
A CFO says on a call: "We're at $2.1M MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition →, growing 8% month over month, burning $600K a month." In the next ten seconds, everyone competent on that call has silently done three calculations and formed a view on whether the business is healthy. If you can't do that math in real time, you're not in the conversation, you're just listening to it.
This lesson gives you those five calculations, cold. MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition → stands for : the predictable subscription revenue a company collects each month, excluding one-time fees.
ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → (Annual Recurring RevenueAnnual Recurring RevenueAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition →) is simply MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition → times 12. It's the headline number every SaaS company reports.
Worked example: MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition → = $2.1M → ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → = $2.1M × 12 = $25.2M.
Watch for the trap: ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → is a run-rate snapshot, not cash actually collected over a year. If a company signed a big customer last week, ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → jumps immediately even though only days of revenue exist. Always ask "as of when?"
Growth rate claims get thrown around loosely ("we grew 8% last month," "we're up 3x year over year"). The professional move is converting monthly growth into annualized terms to compare against benchmarks, because compounding is not intuitive.
Formula: (1 + monthly growth rate)^12 − 1
Worked example: 8% month-over-month compounds to (1.08)^12 − 1 ≈ 152% annualized growth. That's a very different story than "8%" sounds like in a sentence, and it should make you ask whether that rate is sustainable or driven by one lumpy deal.
As of 2025 to 2026, benchmark reports (see OpenView's SaaS Benchmarks, free annual survey) put median annual growth for SaaS companies under $10M ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → at roughly 60 to 100% (estimate, varies by cohort and year), decelerating to 20 to 30% (estimate) above $50M ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition →. If someone claims 150%+ sustained growth at scale, that's a flag to probe, not applaud.
This is the single most quoted SaaS health check. It says growth rate (%) plus profit margin (%) should be at least 40.
Formula: Revenue growth rate + EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → margin (or free cash flowfree cash flowFree Cash Flow is the cash a company generates from operations after funding the capital expenditures needed to maintain and grow its asset base.View full definition → margin) ≥ 40%
EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition →: Earnings Before Interest, Taxes, Depreciation and Amortization, a proxy for operating profitability.
Worked example: A company growing ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → at 30% with a -5% EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.View full definition → margin scores 25. Below 40, meaning investors would want to see either faster growth or less burn. A company growing at 20% with a +25% margin scores 45. Healthier, even though growth looks slower.
The Rule of 40 became popular via public SaaS investors and is referenced constantly in board decks. It's a heuristic, not gospel. Early-stage companies (under ~$5M ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition →) are usually exempt in practice because the growth side dominates and margins are expected to be negative.
Burn multiple tells you how much cash a company burns to generate each new dollar of ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition →. It's become the preferred efficiency metric since the 2022 rate-driven shift toward capital discipline.
Formula: Net BurnNet BurnBurn rate is the speed at which a company spends its cash reserves, usually measured per month, before reaching profitability or raising more funding.View full definition → ÷ Net New ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → (over the same period)
Worked example (continuing our CFO's numbers): Net burnNet burnBurn rate is the speed at which a company spends its cash reserves, usually measured per month, before reaching profitability or raising more funding.View full definition → = $600K/month. Say net new ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → added that month = $200K (i.e., MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition → grew by roughly $17K, extrapolate to net new ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → added in the period, or use quarterly figures for less noise). Burn multiple = $600K ÷ $200K = 3.0x.
Benchmark (per investor Bessemer Venture Partners, whose burn multiple framework is now industry standard, see their State of the Cloud reports): under 1x is excellent, 1 to 1.5x is good, above 2x is inefficient and above 3x is a red flag at scale. Our example CFO's business, burning 3x, would face hard questions in a board meeting or a fundraise.
CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition →: Customer Acquisition CostCustomer Acquisition CostCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition →, the fully loaded sales and marketing spend to acquire one new paying customer. LTVLTVLifetime Value: the total revenue (or profit) a customer generates throughout their entire relationship with your business.View full definition →: Lifetime ValueLifetime ValueLifetime Value: the total revenue (or profit) a customer generates throughout their entire relationship with your business.View full definition →, the total gross profit expected from a customer over their relationship with you.
CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → payback = CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → ÷ (Monthly revenue per customer × gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition → %). This tells you how many months it takes to earn back what you spent acquiring the customer.
Worked example: CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → = $3,000. Customer pays $250/month, gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition → = 80%. Monthly gross profit per customer = $200. Payback = $3,000 ÷ $200 = 15 months.
Benchmark: under 12 months is strong for SaaS, 12 to 18 is workable, over 24 months strains cash flow (estimates, vary heavily by segment; enterprise SaaS tolerates longer paybacks than SMB-focused SaaS).
The companion check is LTVLTVLifetime Value: the total revenue (or profit) a customer generates throughout their entire relationship with your business.View full definition →:CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → ratio, commonly cited target is 3:1 or higher (LTVLTVLifetime Value: the total revenue (or profit) a customer generates throughout their entire relationship with your business.View full definition → at least three times CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition →). Below 3:1, the unit economics likely can't support current spending once you account for churn and operating costs.
Knowledge check
1. A company's ARR jumped significantly this week because a large customer just signed. What is the most important caveat to keep in mind when interpreting this new ARR figure?
2. Why is simply multiplying a monthly growth rate by 12 the wrong way to estimate annualized growth?
3. A founder says their SaaS company is growing at 150% annualized while at $80M ARR. Based on typical SaaS growth benchmarks, how should this claim be treated?
4. Select ALL correct answers about the relationship between MRR and ARR.
Select all the correct answers.
5. Select ALL correct answers about why professionals convert monthly growth rates into annualized figures.
Select all the correct answers.
Back to our CFO. ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → ≈ $25.2M. Annualized growth ≈ 150%+ if the 8% monthly pace holds (unlikely to be sustained, worth probing). Burn multiple = 3.0x (inefficient by Bessemer's framework). Rule of 40: even at a generous 100% blended growth estimate and a heavily negative margin from that burn rateburn rateBurn rate is the speed at which a company spends its cash reserves, usually measured per month, before reaching profitability or raising more funding.View full definition →, you'd need to see the actual margin number to score it properly, but a 3x burn multiple at $25M ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → usually implies a Rule of 40 score well under 40.
The read: fast-growing, but currently inefficient. Not a red flag in isolation (early scale-ups often look like this), but a real question for the next round: does efficiency improve as they approach $50M ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition →, or is this structural?
When someone shows you SaaS numbers, run this sequence in under a minute:
1. Confirm the MRRMRRMonthly Recurring Revenue: the predictable, normalized monthly revenue from active subscriptions, the baseline metric for SaaS and subscription businesses.View full definition →/ARRARRAnnual Recurring Revenue (ARR) is the normalized, predictable revenue a subscription business expects to earn from active contracts over a single year.View full definition → figure and its "as of" date.
2. Annualize any growth rate quoted monthly, don't compare monthly and annual figures directly.
3. Compute Rule of 40 if margin data is available.
4. Compute burn multiple if cash burn is disclosed.
5. Ask for CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → and gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition → to get payback period, the number most often omitted because it's the least flattering.
For US and Europe context: as of 2025 to 2026 estimates, the US SaaS market remains roughly 2 to 3 times the size of Europe's by revenue (commonly cited industry estimate, exact figures vary by source and definition), and European SaaS companies typically report lower CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → and slower but steadier growth than US peers, partly due to smaller domestic markets forcing earlier multi-country expansion and more capital-efficient habits.
🎬 [VIDEO: "SaaS Metrics 101" - youtube.com - search for Bessemer Venture Partners or a16z SaaS metrics explainer walking through Rule of 40, burn multiple, and CACCACCustomer Acquisition Cost (CAC) is the total sales and marketing spend divided by the number of new customers gained in a period. It measures how efficiently you grow.View full definition → payback with real investor framing]