Growth accounting
Growth accounting shows how a business grew, not just how fast: the quick ratio and the mix of new, expansion and reactivation.
Also Quick ratio · SaaS quick ratio · Growth mix
Growth accounting decomposes each period's MRR change into its five movements and reports the quick ratio — gross additions divided by gross losses — together with the mix of additions by source.
- Formula
quick ratio = (new + expansion + reactivation) ÷ (contraction + churn) · mix = each addition type ÷ gross additions- Unit
- ratio · %
- Bounded
- undefined when losses are zero · 1.0 = replacing exactly what is lost
- Defaults
- quarterly · reactivation counted as an addition · constant-currency comparison alongside
- Biggest lever
- Period length — monthly is volatile, annual nets away the turning points
- Read with
- The movement taxonomy · NRR · Foreign exchange
- Appears in
- Board deck · Investor update
What it measures
A growth rate is a single number that conceals its own composition. Growth accounting restores the composition: it asks not how fast a business grew but how it grew, and whether the way it grew is repeatable.
Quick ratio = (new + expansion + reactivation) ÷ |contraction + churn|.
The interpretation follows directly from the arithmetic rather than from any benchmark:
- Exactly 1.0 — the business adds precisely what it loses. Every unit of new revenue replaces a lost one; growth is zero, whatever the sales effort.
- Above 1.0 — additions exceed losses; the business grows net.
- Below 1.0 — the business is shrinking even while selling.
The ratio’s value is that it is scale-free and pace-free. A company adding 10 and losing 2 (ratio 5.0) and one adding 100 and losing 20 (also 5.0) have the same growth efficiency at different scales. Two companies with identical growth rates and quick ratios of 5.0 and 1.2 have entirely different futures: the second is running a treadmill, and its growth stops the moment sales slows.
Mix decomposes gross additions into new, expansion and reactivation shares. A business growing on expansion has a different cost structure and a different risk profile from one growing on new logos — expansion is generally cheaper to acquire and concentrates the revenue base, while new-logo growth is more expensive and diversifies it. Neither is superior; they are different machines, and a change in the mix over time is often the earliest visible sign that a go-to-market motion is changing.
How it is computed
For each period (quarterly by default, following the fiscal calendar):
- Sum each movement type across the period, signed as in the bridge.
- Gross additions = new + expansion + reactivation.
- Gross losses = |contraction + churn|.
- Quick ratio = additions ÷ losses. Where losses are zero the ratio is undefined and is reported as such rather than as infinity or a large number.
- Mix = each addition type ÷ gross additions.
The same movements that produce the bridge produce these figures, so the two views cannot disagree.
Alongside, the constant-currency comparison restates the period at a fixed base-period exchange rate, isolating how much of the reported change was operating and how much was translation. See FX.
Worked example
Two quarters for the same business:
| Q1 | Q2 | |
|---|---|---|
| New | 100 | 60 |
| Expansion | 40 | 90 |
| Reactivation | 10 | 10 |
| Contraction | (20) | (25) |
| Churn | (30) | (35) |
| Net change | +100 | +100 |
| Quick ratio | 3.0 | 2.67 |
| Mix: new | 67% | 38% |
| Mix: expansion | 27% | 56% |
Identical net growth. Entirely different quarters. Q2’s growth came predominantly from the installed base while new-logo acquisition fell 40%, and losses grew. A headline “we grew 100 again” is true and uninformative; whether Q2 is good news depends on whether the shift to expansion was deliberate.
The choices that change the number
- Period length. Monthly quick ratios are volatile; annual ones smooth away the turning points. Quarterly is the default compromise.
- Reactivation in the numerator. Included here as a gross addition. Excluding it lowers the ratio and treats win-backs as recoveries of a prior loss rather than as new revenue — defensible, and a different number.
- The reactivation window, again: a longer window removes both a churn and a reactivation from the same period, raising the ratio by shrinking the denominator.
- FX treatment. Currency-driven movements inflate both additions and losses in a multi-currency book. The constant-currency view removes them.
How it is misread
Quick ratio quoted without the mix. A high ratio driven entirely by expansion in a business with no new logos is a ceiling approaching, not health.
Comparing quick ratios across period lengths. A quarterly and an annual ratio are not comparable; longer periods net more offsetting movements internally.
Treating an undefined ratio as excellent. Zero losses in a period usually means a small base or a short history, not perfection.
Ignoring reactivation’s double-count risk. If reactivations are counted as new and the original churn stays in the denominator of an earlier period, the same customer has been counted as a loss and as an acquisition. The movement taxonomy prevents this; ad-hoc spreadsheet versions frequently do not.
What it cannot tell you
Growth accounting is silent on cost. A quick ratio of 4.0 achieved with unsustainable acquisition spend and one achieved through organic word of mouth are identical here. It is also silent on quality of revenue: expansion won by discounting shows as expansion. Pair it with unit economics, which require cost data this standard does not assume.
How to state it
A disclosure that travels with the number. Replace the braces; keep the parenthesis.
Quick ratio {x} · mix new {a}% / expansion {b}% / reactivation {c}% (SoF Standard v1.0: quarterly · reactivation in additions) Before you quote it
- Mix shown with the ratio?
- Period length stated?
- Undefined reported as undefined, not as infinity?
- FX-driven movements removed in the constant-currency view?
Related questions
- What is the SaaS quick ratio?
- Gross additions divided by gross losses over a period: new plus expansion plus reactivation MRR, over the absolute value of contraction plus churn. Exactly 1.0 means the business replaces precisely what it loses. Above 1.0 it grows net; below 1.0 it shrinks even while selling. The ratio is scale-free and pace-free, which is why it is read together with the mix of additions.
- What is a good quick ratio?
- Exactly 1.0 is the arithmetic reference point: additions equal losses. The widely quoted target of 4 originates with Mamoon Hamid at Social Capital as a rule of thumb for early-stage companies, under a definition that folded reactivation into expansion. Read any target against the period length and the mix, never as a threshold on its own.
- Is reactivation counted as an addition?
- Yes, under this standard, as its own line inside gross additions. Folding it into expansion or excluding it are both defensible and both change the ratio; the taxonomy keeps it separate so the choice stays visible.
- Quick ratio versus NRR: what is the difference?
- NRR measures a fixed base of existing customers over a window. The quick ratio measures a period's gross additions, new logos included, against its gross losses. A high ratio driven entirely by expansion with no new logos is a ceiling approaching, which is why the mix is reported with it.
- Should the quick ratio be monthly, quarterly or annual?
- Quarterly by default. Monthly ratios are volatile; annual ones net offsetting movements internally and smooth away the turning points. Ratios across different period lengths are not comparable.
- Does the quick ratio account for the cost of growth?
- No. A ratio of 4 achieved with unsustainable acquisition spend and one achieved organically are identical here. Pair it with unit economics, which need cost data the revenue file does not contain.
Strategy of Finance. “Growth accounting.” SoF Standard Definitions v1.0 (2026-09-18). https://www.strategyoffinance.com/standards/growth-accounting/