Complementary terms like revenue, billing, collections, and bookings are often seen as doppelgängers. Although interrelated, they mean different things in the world of SaaS. Booking vs. revenue and billings are the top three generally used metrics. So let’s digest them separately.
View the chart of customer subscriptions. It is not as fun as the birth chart but hang in there.
All customers are getting you a 12-month upfront payment for the annual contract.
Booking is a forward-looking metric that stands for “intention” or represents the commitment of a customer to spend money over a certain period. So when a customer signs up for a paid plan, this occasion will be evaluated as a booking.
And in return, your SaaS provides them with the services.
The promise of revenue, aka booking, in most cases, is secured by contract at the moment of the signup. The subscription contract can be signed physically and electronically if we discuss complete self-service platforms.
So to make it easier to differentiate between booking vs. revenue, consider booking as the contract with your client. They signed it but have not yet used your services or paid you.
You might be interested in how this forward-looking metric affects your business performance, hence the stats in converting their leads into paid customers. It is essential to keep track of bookings because it represents the overall vibe check of sales and business growth. While it is true that Generally Accepted Accounting Principles don’t include the definition of Bookings, they usually refer to this concept as
The value of a subscription/contract signed for a given period with a customer.
For example, one of your customers purchases a 2-year plan at $10,000 annually. How much revenue will you get? We don’t know. But your bookings on the contract are $20,000.
It’s fantastic to close a multi-year contract, but they don’t pay the bills of your employees. No salaries are out of future commitments. Moreover, you can’t document it as revenue until you provide your service. So bookings are great at telling a part of the story and representing the general health of sales.
You can divide bookings into three categories:
- New bookings—new customers who have just signed up for a product or service.
- Renewal bookings—existing customers who are renewing.
- Upsell bookings—customers who have decided to update their contract.
Lesson learned: bookings indicator will help you understand your business’s revenue growth trajectory.
Billing is the next phase after booking in a SaaS business.
The definition of billings in SaaS accounting
*Please insert a Bills Bills Bills song by Destiny’s Child*
Billing is the event of collecting money from your customers who have booked your product or service. Your customers get billings as invoices. In the 2-year contract example above, your billings are the annual charge you invoiced the customer—$10,000 each year.
The billing and booking amounts would be the same if the customer prepaid the contract for the entire term.
If you are looking for templates to help you keep track of bookings, billings, and revenue, find the ones that will allow you to change the billing options to see their effect on cash flow.
Try to collect your accounts receivables since, ideally, your billings will be close to cash, with cash lagging based on your payment terms & collections effectiveness.
Since you also cannot pay the salary with billings, it is safe to say that your billings don’t translate directly into revenue. Instead, the revenue comes once you have delivered your service.
If a customer pays the invoice, gets you $12,000 for the year, and pays you with no delay, you’ll have the cash in your account. However, you can only recognize a portion of it as revenue. So you’ll put the rest in a deferred revenue account.
Deferred revenue is a short-term liability account because it’s like a debt. However, instead of the money you owe, it constitutes goods and services owed to customers.
Deferrals like deferred revenue are commonly used in accounting to record income and expenses in the period they occurred accurately. And the money will stay in a liability on the balance sheet until you deliver the service. As a result, companies that close many yearly billing deals tend to have high deferred revenue.
The definition of revenue in SaaS
As you probably, guessed, revenue is the money a business earns after it provides its services or products to the customer.
According to GAAP, revenue can only be recognized once it is ‘earned.’ This might seem like a toxic concept since “Hey, am I going to get points for trying?”.
Revenue accounting has some pretty strict rules since nobody wants to go to jail and lose money. Revenue is the “golden ratio” metric of accounting. Investors will be the most interested in it as your business matures.
Let’s talk tactics. What might skyrocket your bookings but leave you high and dry with two subscribers at the end of the quarter? Giving customers crazy discounts to sign multi-year contracts can inflate bookings. And offering discounts to clients who prepay can increase billings.
Remember how Tom Odel’ has a song, “I can’t pretend”? Well, if a so-so business does it, it can temporarily create the impression of higher growth. The aggressive discounting will eventually come at the expense of deferred and recognized revenue. Any decent investor will balance all three metrics to get a fuller picture of the top-line growth of the business.
Hey, do not worry if you just realized that you had done it wrong the whole time. The distinction between bookings vs. billings vs. revenue in a SaaS business can puzzle even experienced executives. Here at Fuelfinance we always make sure our client understands the difference, but we take care of every spreadsheet since we are a machine and only have been doing it forever.
Differences between Bookings, Billings, and Revenue
Bookings, billings, and revenue are three different metrics, and taking a look at each one of them separately & together can measure a SaaS business’s health.
When you analyze these metrics, you have vital information like revenue booked by your company, periodical (monthly, quarterly, half-yearly, or annually) revenue, billed payment, etc.
Now we can proceed toward the differences between these terms to give you a clearer picture.
Stages in Businesses
#1 stage: booking. A customer books a product or service.
#2 stage: bills. The money is actually received from the customer. No services are delivered at this point.
#3 stage: revenue recognition. The product or service is delivered to the customer.
Impact on Financial Reports
Bookings do not have a direct effect on financial or income statements. Why use it? To get a view of their business performance.
Billings impact the cash flow statement, balance sheet, and income statement.
Revenue recognition also impacts the balance sheet and income statement because the income is realized for the business.
This includes ratios such as:
- Pipeline to bookings
- Bookings to revenue
- Revenue to cash
SaaS companies also collect the data to come up with unique historical data. So can you answer the question, based on these ratios and numbers, what does our pipeline need to be to hit our revenue? Make sure your business has predictable cash flows and is built for growth: take care to understand the difference between bookings, billings, and revenue.
Why Understanding the Differences between these terms is Important for SaaS Business Owners?
You cannot hide from booking, billing, and revenue in any business. However, Saas startups need to operate them differently.
A SaaS business should not use these as financial reporting tools only. Analysis of booking, billing and revenue figures can help SaaS businesses extract much information to enable the CEO to make quick decisions. For example, you may not need to prolong your crazy subscription sale or give your customer two free months instead of 4. And you can get this insight by looking at the metric of booking. As you see, these crucial decisions do include not only financial decisions but also decisions related to other areas of business operation.
Another example. Suppose you have an excellent booking rate. However, it significantly reduces at the billing stage. What does it mean? This scenario indicates that your marketing team successfully sends your business message and attracts customers willing to pay for your product. But, you are bad at holding customers and taking the money they are willing to pay. Knowing this indicator, you will be searching for the gap in performance and better your revenue-generating capacity.
The metrics can also tip off managers when to plan commissions and variable compensation payments to their sales representatives.
Your main take from this text is that knowing a company’s bookings, revenue, and billings will get you insights into the subscription model or cadence of the business.
It is okay if you understand the concept but still have trouble understanding what Excel formulas are relevant to your situation. You are a CEO, and your job is to make decisions based on data, not keeping track of it.
The most successful SaaS businesses forecast revenue based on accurate pipeline data and continuously track the relationship between bookings, billings, and revenue.