How To Calculate Rule of 40 in FinancialForce | Arithmix

Calculating the Rule of 40 is an important metric for evaluating the health of a company. It is a simple formula that takes into account a company's revenue growth rate and profitability. In this article, we will explain what the Rule of 40 is, when it is valuable to calculate it, and how to calculate it in FinancialForce.

What Is Rule of 40?

The Rule of 40 is a formula that helps investors and analysts evaluate the health of a company. It takes into account a company's revenue growth rate and profitability. The formula is simple: a company's revenue growth rate plus its profit margin should equal at least 40%. For example, if a company has a revenue growth rate of 20%, its profit margin should be at least 20% to meet the Rule of 40.

The Rule of 40 is not a hard and fast rule, but rather a guideline. Companies that meet or exceed the Rule of 40 are generally considered to be healthy and well-managed. Companies that fall short of the Rule of 40 may be experiencing growth or profitability issues that need to be addressed.

When Is It Valuable To Calculate Rule of 40?

The Rule of 40 is valuable to calculate for investors and analysts who are evaluating the health of a company. It can be used to compare companies within the same industry or to evaluate a company's performance over time. The Rule of 40 is particularly valuable for evaluating companies in the technology industry, where revenue growth is often prioritized over profitability.

Calculating the Rule of 40 can also help companies evaluate their own performance and identify areas for improvement. If a company falls short of the Rule of 40, it may need to focus on improving its revenue growth rate, profit margin, or both.

How to Calculate Rule of 40 in FinancialForce

Calculating the Rule of 40 in FinancialForce is straightforward. First, you will need to gather the necessary data: the company's revenue growth rate and profit margin. These can be found in FinancialForce's financial statements or by using FinancialForce's reporting tools.

Once you have the necessary data, you can calculate the Rule of 40 using the following formula:

(Revenue Growth Rate + Profit Margin) x 100 = Rule of 40

For example, if a company has a revenue growth rate of 20% and a profit margin of 20%, its Rule of 40 would be:

(20% + 20%) x 100 = 40%

If a company's Rule of 40 is below 40%, it may need to focus on improving its revenue growth rate, profit margin, or both. If a company's Rule of 40 is above 40%, it is generally considered to be healthy and well-managed.

In conclusion, the Rule of 40 is a valuable metric for evaluating the health of a company. It takes into account a company's revenue growth rate and profitability and can be used to compare companies within the same industry or to evaluate a company's performance over time. Calculating the Rule of 40 in FinancialForce is straightforward and can help companies identify areas for improvement.

How Do You Calculate Rule of 40 in FinancialForce

FinancialForce itself isn’t naturally geared towards letting you calculate complex metrics like Rule of 40. As an alternative, teams typically use products like Arithmix to import data from FinancialForce and build out dashboards.

What is Arithmix?

Arithmix is the next generation spreadsheet - a collaborative, web-based platform for working with numbers that’s powerful yet easy to use. With Arithmix you can import data from systems like FinancialForce, combine it with data from other systems, and create calculations like Rule of 40.

In Arithmix, data is organized into Tables and referenced by name, not by cell location like a spreadsheet, simplifying calculation creation. Data and calculations can be shared with others and re-used like building blocks, vastly streamlining analysis, model building, and reporting in a highly scalable and easy to maintain platform. Data can be edited, categorized (by dimensions) and freely pivoted. Calculations are automatically copied across a dimension - eliminating copy and paste of formulas.

Arithmix is fully collaborative, giving your entire team access to your numbers and the ability to work together seamlessly.

Calculating Rule of 40 in Arithmix

Calculating metrics like Rule of 40 is simple in Arithmix. Once you've created your free account, you’ll be able to import your FinancialForce data, and use it to create natural language formulas for metrics like Rule of 40.

Arithmix is designed to give you the power to build any calculations you want on top of your FinancialForce data, while also being easy to use and collaborate on. You can share your dashboards with users inside and outside of your organisation, making it easy to empower your whole team.