A conversation with the CEO of a SaaS company today reminded me of the importance of the rule of 78s. What is this “rule”, you ask. If you run a recurring revenue business, it is the most important number you have never heard of.
Incremental revenue added in January will produce revenue for 12 months; incremental revenue added in February will produce revenue for 11 months; …; incremental revenue added in December will produce revenue for 1 month. The sum of digits for 12 is: 12 + 11 + 10 + … + 2 + 1 = 78