SaaS quick ratio

The SaaS quick ratio compresses the ARR bridge into one leak detector: how much ARR do we add for each dollar we lose?

Quick ratio = (New ARR + Expansion ARR) / (Contraction ARR + Churned ARR)

It does not say whether those added dollars were bought at a sane CAC. Pair it with payback and burn multiple.

The big idea

If you pour three liters in for every liter that leaks, the bucket still fills. If you pour one for one, you are running in place. The quick ratio is that pour-to-leak fraction.

The analogy breaks when the "pour" is paid for with catastrophic CAC. A ratio of 4 bought at a 30-month payback can still kill the company. High ratio plus terrible unit economics is a treadmill with good optics.

Walking through it

Using the $10M → $13.5M year: +$3.0M new, +$2.0M expansion, −$0.5M contraction, −$1.0M churn.

Quick ratio = (3.0 + 2.0) / (0.5 + 1.0) = 5.0 / 1.5 ≈ 3.33

Rules of thumb often cited in operator circles:

You do not need to be VP Finance to use this. Notice when a "successful" launch adds new ARR while GRR falls — you are filling a leaky bucket. Notice when support cost scales with logos that revenue churn says are worthless to keep.

Common mistakes

• Treating the ratio as a substitute for unit economics. It ignores CAC.
• A one-month ratio on lumpy enterprise. One lost whale wrecks a quarter; use a longer window.
• Stuffing one-time services into "new ARR" to juice the numerator.
• Ignoring a falling GRR because the quick ratio still looks fine. New sales are the only thing working.

Check yourself

New $3M, expansion $2M, contraction $0.5M, churn $1M. Quick ratio?

About 3.33.

A quick ratio of 4 with 30-month payback. Healthy?

The leak detector looks fine. Cash may not. Check payback and burn.

Key takeaways

• Quick ratio = (new + expansion) / (contraction + churn).
• Under 1 is leaking. Around 2 is okay. 4+ is strong — as a heuristic.
• It cannot see CAC. Pair it with payback and burn multiple.
• Use it as a leak detector, not as a score to optimize in isolation.

Further learning

SaaS Metrics 2.0 (David Skok)“If you cannot measure it, you cannot improve it” – Lord Kelvin This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updat…For Entrepreneurs

Clouded Judgement (Jamin Ball)Weekly data driven analysis of AI and software companies. Click to read Clouded Judgement, by Jamin Ball, a Substack publication with tens of thousands of subscribers.cloudedjudgement.substack.com

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