Quick Ratio
When you need this method
Your gross new business looks strong, but net growth lags behind it. Growth numbers without netting out losses hide how much of every euro won immediately drains away. You need a metric that exposes growth efficiency after leaks.
Approach
- 1Track new MRR, expansion, churn and contraction separately each month.
- 2Calculate the quick ratio: (new MRR + expansion) divided by (churn + contraction).
- 3Read the value against the threshold: 4 or more is healthy, with top performers well above; 4 is the floor, not the goal.
- 4For low values, decompose whether the leak comes from cancellations or from downgrades.
- 5Prioritize retention work before investing more in acquisition.
Typical application
A typical case: a fast-growing SaaS celebrates new sales records every month, yet net MRR barely grows. The quick ratio sits well below the threshold: a large share of new business merely replaces what is simultaneously lost to cancellations and downgrades. Decomposition shows one customer segment in particular shrinking shortly after contract start. The team halts the sales budget increase and first invests in onboarding and product fit for that segment.
Limits and counter-indications
The quick ratio is a flow metric and says nothing about absolute size or profitability. Averaging across segments can hide opposing developments; beware of misleading aggregates. On very small MRR bases the value jumps around and is only reliable as a trend.
How to measure impact
Quick ratio tracked monthly or quarterly, complemented by decomposing the denominator into churn and contraction.
Related methods
Sources
- 1.The 2024 ICONIQ Growth Resiliency Rubric, ICONIQ Growth (opens in a new tab) · ICONIQ Growth · 2024 · investment, consulting and analyst firms, industry bodies and public agencies · provides benchmark figuresRuns the metric as one of five diagnostics, gives the calculation from new and expansion revenue against churn and contraction, and puts the top quartile at around 3 even beyond 100 million in recurring revenue.
- 2.Diligence at Social Capital · Part 2: Accounting for Revenue Growth, Jonathan Hsu (opens in a new tab) · Social Capital (veröffentlicht auf Medium) · 2015 · practitioner source · describes the methodCarries the decomposition of revenue growth into new, existing, resurrected and expansion revenue, plus the diagnostic rules that a value above 4 is preferred and below 2 points to excessive churn.
- 3.What is the Quick Ratio Hiding?, Tomasz Tunguz (opens in a new tab) · tomtunguz.com · 2015 · practitioner source · limits the methodCarries the formula and target value and adds the warning that high growth rates can conceal high revenue churn in the denominator.
Origin: Hamid · Adapted from: Tomasz Tunguz (Redpoint)