How To Calculate Rule of 40 in Wave Accounting | Arithmix

Calculating the Rule of 40 is an important metric for any business owner, as it helps determine the health and growth potential of a company. In this article, we'll explain what the Rule of 40 is, when it's valuable to calculate, and how to calculate it in Wave Accounting.

What Is Rule of 40?

The Rule of 40 is a metric used to evaluate a company's growth potential and profitability. It's calculated by adding a company's revenue growth rate and its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin. The resulting number should be at least 40% for a company to be considered healthy and have the potential for growth.

For example, if a company has a revenue growth rate of 20% and an EBITDA margin of 30%, its Rule of 40 score would be 50% (20% + 30% = 50%). This means that the company is healthy and has the potential for growth.

When Is It Valuable To Calculate Rule of 40?

The Rule of 40 is valuable to calculate for any business owner who wants to evaluate the health and growth potential of their company. It's especially useful for startups and high-growth companies, as it helps determine whether they're on the right track to success.

By calculating the Rule of 40, business owners can identify areas where they need to improve, such as increasing revenue or improving profitability. It can also help them make informed decisions about investments, acquisitions, and other strategic moves.

How to Calculate Rule of 40 in Wave Accounting

To calculate the Rule of 40 in Wave Accounting, you'll need to gather two pieces of information: your revenue growth rate and your EBITDA margin.

Your revenue growth rate can be calculated by comparing your current revenue to your revenue from the previous year. For example, if your revenue was $100,000 last year and it's $120,000 this year, your revenue growth rate would be 20%.

Your EBITDA margin can be calculated by dividing your EBITDA by your revenue. For example, if your EBITDA is $30,000 and your revenue is $100,000, your EBITDA margin would be 30%.

Once you have these two pieces of information, simply add them together to get your Rule of 40 score. If your score is at least 40%, congratulations! Your company is healthy and has the potential for growth. If your score is below 40%, it's time to evaluate where you need to improve.

Calculating the Rule of 40 in Wave Accounting is a quick and easy way to evaluate the health and growth potential of your company. By regularly calculating this metric, you can stay on top of your company's performance and make informed decisions about its future.

How Do You Calculate Rule of 40 in Wave Accounting

Wave Accounting 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 Wave Accounting 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 Wave Accounting, 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 Wave Accounting 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 Wave Accounting 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.