Growth used to be everything. In the past decade, companies were rewarded simply for scaling, for expanding ARR, hiring quickly, and pushing into new markets, often regardless of underlying profitability.

But investors have grown more cautious. Capital is more expensive, margins matter more, and expectations have shifted. A metric that is increasingly seen as a useful shorthand for balancing these tensions is the Rule of 40. The principle that a company’s growth rate plus its profit margin should equal or exceed 40%.

The Rule of 40 is no longer confined to SaaS. Across technology, services, and private equity-backed enterprises, there is a growing recognition that growth without profitability, or profitability without growth, does not tell a complete story. 

On Next Exit, finance leaders such as Sun Choi and Blaine Fitzgerald highlighted this shift, showing how the Rule of 40 is emerging as a valuable lens for CFOs to evaluate strategy, operations, and investor communication.

In this article, we explore three lenses through which CFOs often frame performance: the Profitability Lens, the Efficiency Lens, and the Balance Lens, where the Rule of 40 acts as a compass. Each offers a different perspective on value creation. The aim is to show how the Rule of 40 can complement these approaches and strengthen your finance narrative, particularly with investors.

What the Rule of 40 is, and why it matters now

At its simplest:

Rule of 40 = Growth Rate (%) + Profit Margin (%) ≥ 40%

Here, “growth rate” typically refers to year-on-year revenue growth (often recurring revenue in subscription models), and “profit margin” is most often measured as EBITDA margin or free cash flow margin, depending on how the business defines profitability.

The Rule of 40 has moved from a SaaS niche metric to a mainstream yardstick, reflecting investor demand for businesses that can show both efficient growth and credible margin discipline. A McKinsey study found that barely one-third of SaaS companies currently meet the threshold when combining growth and free cash flow. This highlights just how demanding the metric is, and why investors increasingly use it to test whether growth is credible and sustainable.

Key factors driving this shift include:

• Rising cost of capital. Higher interest rates have removed tolerance for “growth at any cost.”
  
• Demand for operational resilience. Investors want proof that margins can withstand shocks, not just short-term revenue gains.
  
• Simpler benchmarking. The Rule of 40 offers a clear way to compare businesses across sectors and stages.

How CFOs frame performance today

These market dynamics shape how CFOs talk about performance. While every finance leader has their own priorities, most perspectives cluster around three lenses.

The Profitability Lens: The Traditionalist CFO

For many CFOs, especially in private equity-backed businesses, performance starts with profitability. Their north star is EBITDA, cash conversion, and balance sheet strength. They view profitability as the ultimate arbiter of credibility and often downplay growth metrics as transient or unreliable.

This approach became dominant in the years after the global financial crisis, when PE sponsors installed CFOs tasked with stabilising companies, protecting liquidity, and keeping lenders comfortable. The same dynamic resurfaced during COVID, when cash preservation became an existential priority.

Even today, profitability remains top of mind. EY’s Global Private Equity Survey highlights that cash flow and working capital discipline continue to be key priorities for PE CFOs seeking to drive value. Meanwhile, PwC’s May 2025 Pulse Survey reports that 58% of CFOs are increasing investment in AI and analytics, with many focusing on performance improvement initiatives as higher interest rates put greater pressure on margins.

The strength of this lens is credibility. Few investors will criticise strong EBITDA or free cash flow. A profitability-first stance reassures lenders, sustains dividend capacity, and stabilises valuations in downturns.

But there are trade-offs. Over-indexing on profitability can create the perception of a business that is stagnating. Growth opportunities may be underfunded, innovation deprioritised, and long-term valuation capped. A company that can show 30% EBITDA margins but only 2% growth risks being seen as a “cash cow” rather than an attractive growth platform.

This trade-off is why some investors now ask not just about EBITDA, but about how capital allocation is funding future growth engines.

📌 Takeaway for CFOs: Profitability is essential, but on its own, it is no longer enough. Pair margin discipline with a narrative that shows how growth will return or accelerate.

The Efficiency Lens: The Operator CFO

Another common lens is efficiency. Operator CFOs are execution focused. They prioritise unit economics, operational leverage, and data integrity. Their goal is to ensure forecasts are accurate, costs are efficient, and teams are performing at full capacity.

This approach is backed by data. Deloitte’s CFO Signals survey (Q4 2024) found that automating processes to free up employees for higher-value work and enabling greater self-service finance capabilities were among the top transformation priorities for CFOs. Similarly, PwC’s May 2025 Pulse Survey reported that 58% of CFOs are investing in AI and advanced analytics to respond to volatility, with more than half accelerating digital transformation through automation, analytics, and cloud tools.

Operator CFOs translate this into practice through initiatives such as:

• Rolling 13-week cash forecasts to improve liquidity visibility.
  
• Automation of management reporting to reduce manual errors and free up team capacity.
  
• Margin analysis by product or customer segment to identify where growth is actually profitable.
  
• Unit economics discipline, especially in SaaS or subscription businesses, where lifetime value and acquisition cost drive investor confidence.

Increasingly, efficiency is also tied to resilience. Deloitte notes that CFOs are prioritising automation not just for cost reasons, but to free capacity for strategic initiatives such as ESG reporting, digital transformation, and advanced analytics. This broadens the Operator CFO’s role from controller to enabler of growth.

The Operator lens builds trust. Boards and investors value predictability, and efficiency improvements compound credibility over time.

But efficiency on its own does not always excite investors. Execution alone may not capture upside potential, particularly in growth-focused sectors. Without tying operational rigour to a bigger story, Operator CFOs risk being seen as excellent controllers rather than strategic leaders.

📌 Takeaway for CFOs: Operational excellence builds trust, but narrative matters too. Use the Rule of 40 to connect efficiency gains with the bigger growth story.

The Balance Lens: The Strategist CFO

The Rule of 40 comes into its own in the Balance Lens. Here, CFOs explicitly weigh growth against profitability, using the metric as a compass for sustainable performance.

Blaine Fitzgerald, CFO of Kanaxis, explained how his team applies it:

“Although we are a growth-first company, we want to do that sustainably. One of the terms we like to use is a growth of 40. That means we balance year-on-year revenue growth with adjusted EBITDA. When we add those percentages, we expect it to be over 40, and we have delivered that for years.”

Blaine's perspective highlights how the Rule of 40 is increasingly used as a signalling tool, showing investors that growth can be achieved without sacrificing financial discipline.

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Sun Choi, who works with SaaS scale-ups, frames it as a post-ZIRP reality check:

“In the zero interest rate era, capital flowed freely and growth was rewarded regardless of the losses underneath. That world does not exist anymore. Investors expect to see discipline. The Rule of 40 has become the shorthand for proving it.”

Strategic CFOs are bilingual. They can communicate in both growth and profitability terms, aligning management teams and investors around a single narrative. In practice, this means linking pipeline forecasts to EBITDA sensitivities, embedding margin targets in GTM planning, and using the Rule of 40 as a headline KPI in board packs.

Research backs the advantage. BCG’s 2025 benchmarking shows companies that exceed the Rule of 40 tend to perform better across valuation-relevant metrics, margins, retention, and growth scale. 

📌 Takeaway for CFOs: The Rule of 40 is a narrative tool. Use it to prove that ambition and discipline can coexist.

How to Make the Rule of 40 Work in Practice

The Rule of 40 is powerful, but only if used wisely. Treating it as a scoreboard without context risks distortion. Used well, it can guide strategy, align stakeholders, and build investor confidence.

A worked example

A company growing revenue at 25% with a 10% EBITDA margin scores 35 on the Rule of 40. To reach 40, the CFO has options:

• Increase growth to 30% while holding margins steady.
  
• Lift margins to 15% while maintaining 25% growth.
  
• Aim for smaller gains in both: 27% growth and 13% margins.

Each path has different implications. Faster growth may require more investment in sales and marketing. Higher margins may mean tighter cost controls or better pricing discipline. Balanced improvements require cross-functional coordination.

Pitfalls to avoid

• Over-adjusted margins. Presenting inflated “adjusted EBITDA” figures erodes credibility.
  
• Unsustainable growth boosts. Discounts or aggressive promotions can lift growth temporarily but damage long-term margin.
  
• Cutting too deep. Over-zealous cost reduction may improve margins in the short term, but harm retention or product innovation.

Best practices

• Scenario modelling. Show boards and investors how different growth and margin combinations affect Rule of 40 outcomes.
  
• Integrated forecasting. Link sales pipeline projections to EBITDA forecasts to show how growth translates into profitability.
  
• Transparent reporting. Make Rule of 40 performance a standard KPI in board packs and investor updates, with a clear explanation of drivers.

📌 Takeaway for CFOs: Treat the Rule of 40 as a compass, not a finish line. The value is in showing how you plan to achieve it, not just in posting the number.

Why the Rule of 40 Matters for Today’s CFOs

The Rule of 40 is not about dividing CFOs into winners and losers. It is about providing a shared reference point for boards, investors, and leadership teams.

It matters because:

• Investors are using it as a screen. Companies that can articulate their Rule of 40 position are more likely to win confidence.
  
• Valuations reflect it. Research shows companies above the threshold often command a premium.
  
• It aligns teams. Having a simple, shared number forces commercial, operational, and finance teams to make trade-offs together.
  
• It mitigates risk. When growth slows, the margin can preserve credibility. When margins compress, growth can keep the story alive.

The Rule of 40 as Compass

The Rule of 40 is not a silver bullet, but it has become a valuable reference point. It offers CFOs a way to frame balance, communicate credibility, and align their organisations around sustainable performance.

Seen through the three lenses, its role becomes clearer:

• Profitability first CFOs can use it to show discipline without losing sight of growth.
  
• Efficiency-focused CFOs can translate operational improvements into strategic impact.
  
• Balanced CFOs can use it as a simple, compelling signal that ambition and resilience can coexist.

Across all three, forecasting is the thread that makes the Rule of 40 meaningful. Without accurate, investor-ready forecasts, it is just an equation. With them, it becomes a compass for long-term value creation, helping CFOs navigate trade-offs, win investor confidence, and sustain momentum in changing markets.

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