Terms like revenue, billing, collections, bookings are often used interchangeably and although interrelated, they mean different things in the world of SaaS. Booking, revenues and billings are among the three most commonly used metrics that’s why we have dedicated a separate post for these three.
For the sake of explaining, let’s consider this sample data set of customer subscriptions.
|Customer||Joined in||Plan||Interval||Amount||Contract Value|
To make things easier here, we’re considering that all customers are paying 12 months upfront for yearly plans – more on that here – which may or may not be true in your case. It’s common that companies offer customers the option to commit to a full year but still bill them monthly.
Being a forward-looking metric, bookings represent the commitment of a customer to spend money over a period of time and in return you provide them with the services. The commitment in most cases is tied to a contract in the moment of the signup/subscription, that can be both be signed physically or electronically in the case of full self-service platforms. To make it easier, think of booking as the contract with your customer – he signed it (may be not on a paper but by showing a commitment or signing up online), but didn’t use your service nor paid you yet.
What makes keeping track of bookings so important is because it represents the overall health of sales and business growth. There is no standard definition for Bookings in GAAP (Generally Accepted Accounting Principles), so it is generally referred to as the value of a subscription/contract signed for a given time period with a customer.
Bookings is an essential metric for all subscription businesses, especially startups that don’t yet completely follow best accounting practices. Bookings gives such businesses a fair idea of potential revenues and how the market is reacting to their services. Bookings also help marketers better understand what’s working and enhance their customer acquisition strategy.
Now here’s the thing: if a customer signs up for a 12-month plan – in our $100/mo example – they’re committing to spending $1,200 dollars with your company, right? So that’s what you’ll consider as bookings. Your bookings for a specific month, is the sum of all the closed deals, with different prices and durations. Always consider the full duration of the contract.
Bookings help visualize the committed value of all contracts over a period of time and the amount of money expected to flow into a business. It also shows the market response and demand of a product/subscription. Although the metric is usually recorded in terms of an annual number, many businesses extend it to more than or even less than a year, which makes ‘over a period of time’ a subjective matter.
Considering our sample data set, your bookings for each month would be the sum of all the contract you booked. However, whether a customer will use the service or use it as per the contract length is a different matter.
Types of Bookings
New bookings, upgrades/expansion bookings and renewal bookings are the three common types of bookings SaaS businesses use. But there are several other types as well that many businesses use to predict value upfront. Common factors most businesses consider include new contracts, renewals, planned upgrades/downgrades.
New bookings: Includes new subscriptions/customers as well as existing customers who have subscribed to new services
Renewal bookings: Includes existing contracts that are up for renewal and calculated either when a renewal request is received or the at the time of renewal date.
Upgraded/expansion Bookings: Includes additional bookings through upselling expansion services or upgrades. For example, if a subscriber wants to upgrade from Pro ($500) to an Enterprise Plan ($2,000), he/she has to sign a new contract @ $24,000/year, which will be referred to as upgraded booking.
ACV/TCV Bookings: Annual Contract Value bookings are applicable in case of multi-year contracts in which bookings with a minimum of one-year committed revenue are considered. On the other hand, Total Contract Value Bookings takes into consideration the whole duration of the contract.
Non-recurring Bookings: While most subscriptions are recurring that include defined services, some businesses also consider non-recurring bookings such as training fees, set up/installation fees and discounts.
Revenue is a standard GAAP term and is defined as inflows of assets and/or settlements of liabilities generated through core operations of a business. In the case of SaaS, the core operation is delivering cloud-based services according to the contract and the SLA. Compared to bookings which (in a specified period of time) is the total value of contracts signed, revenue refers to a reasonable guarantee that the contracts will materialize.
Revenue happens when the service is actually provided. Are you recognizing that money coming in exchange for your service or product? In the case of a subscription contract, such as software-as-a-service products, the revenue is recognized ratably over the life of the subscription. So if you’re managing things on a monthly basis, each month you’ll recognize a portion of the money as revenue, 1/12 in case of our yearly plans.
Service providers usually recognize a portion of the contract value each month/quarter/yearly as they provide services over a period of time. With the passage of time deferred revenue shrinks as more payments are collected. Deferred revenue can become a long term liability if it involves multi-year contracts.
Considering our sample data set, your revenue would be the sum of the portion of revenue each customer is bringing in monthly. Keep in mind we’re not considering any kind of churn nor contraction here.
Billings aka cash or payment collection is when you actually collect your customer’s money. It’s the invoice amounts that a business bills to its subscribers/customers and money a business is owed. That can happen at the time of booking in case they’re paying you months in advance, or at the time of revenue recognition in case they’re paying you monthly – even if committed to a full year. The revenues remain a liability if you have received the payment and not yet delivered the services.
Considering our sample data set, we’ll consider two things: if a customer subscribed to a yearly plan, we’ll consider his paying for 12 months upfront and bill for the total contract value – if subscribed to a monthly plan, we’ll consider the plan amount being billed every month.
Recognized vs. Deferred Revenue
Recognized revenue is the revenue generated after a customer has made a booking and the provider has delivered according to the contract. According to GAAP standards, a business can recognize revenue after delivering the services. Bookings can turn into recognized revenue at once or gradually depending on the payment terms. For example, a $1,000 monthly payment in return for services is a recognized revenue each month.
You also want to pay attention to deferred revenue. That’s money you’re already billed – and it’s already on your bank account – but can’t yet be recognized as revenue, because the product/service hasn’t been served to the customer yet. If you usually close a lot of yearly billing deals, you tend to have high deferred revenue.
If a business collects the payments as per contract in advance, bookings become liability aka deferred revenue. That’s because the services have not been delivered yet despite the fact that the payment has been collected. Keeping track of a few hundred transactions is fairly easy, but keeping track of millions of transactions can become complicated if recognized and deferred revenues are not treated separately.
Considering our sample data set, that’s simply billings – revenue.
As mentioned earlier, bookings is not a standard GAAP term, but used for getting a fair picture of sales health and overall business performance. That’s also the reason why bookings don’t impact income statements and other financial reports directly. Since bookings cannot directly be included in financial statements, businesses encourage sales people to convince customers to pay upfront by offering them discounts to increase cash flows.
Revenue recognition is covered by GAAP framework (ASC 606) and is applicable across all sectors and industries. Recognizing revenue might be a little more complicated in the SaaS world because of the recurring business model, but the main principles remain the same.
Metrics vs. the Reality
The reality can differ from the numbers when evaluating data on a multi-year basis. Complexities might start piling up and in return demand an explanation about the differences between projected and reported financial figures. That’s the reason businesses should consider keeping it simple, consistent and transparent to reduce these complexities and reporting difficulties.
Businesses that want to report metrics like bookings should consider accessing data in the long term to make sure they are worth disclosing. More reporting just for the sake of it is not always good. Similarly, clarity and conciseness is important when disclosing to investors and other external parties. Explaining important metrics plainly in an easy-to-understand format minimizes the chances of further inquiries and questions on the validity of financial reports.
SaaS businesses should treat accounting and finance as offensive tools rather than reactive bookkeeping tools. These tools are beneficial only when businesses understand how different pieces of the puzzle work and how each metric impacts business areas.
In SaaS, if you bill your customers upfront billings will be just like bookings, but if you bill monthly billings will be just like revenue. Of course, it will all depend on your specific scenario, product/service, and pricing schema. The important thing to notice here is how your – recurring – revenue grows over time, as you close more deals (book more revenue).
There are also other interesting relations between these metrics. One of them is the book to bill ratio. In some specific industries, not all booked business can be delivered and turn into revenue, as in advertising for instance – it’s like you’re leaving cash on the table.
It’s important you keep track of all these metrics very carefully. You want to know how much revenue your company has booked, how much is your monthly revenues, and how much revenue you have actually billed. In fact, that’s even crucial to decide how to pay commissions and variable compensation to your sales reps, but that’s a topic for another post.