Companies calculate Rule of 40 by adding year-over-year Annual Recurring Revenue (ARR) growth to a profitability measure, usually EBITDA or Free Cash Flow (FCF). While EBITDA is perhaps the best measure of overall investment for company comparison, FCF is more reflective of the actual cash available to the business.
Achieving profitable revenue growth in today’s competitive market is becoming increasingly more difficult. The key is finding the right profitable growth path for your business to help drive to Rule of 40 and beyond.
Demonstrating ARR growth isn’t enough; companies must demonstrate an ability to grow revenue profitably to attain higher multiples in public & private markets.
Set the right operational plan for your company and focus on the appropriate planning levers to ensure revenue growth.