Billings vs. Bookings vs. Revenue—Oh My!

Just like Dorothy making her way through the winding path to Oz, SaaS businesses often find themselves navigating a complex landscape of financial metrics. In this world, billings and bookings and revenue (oh my!) are the key markers that guide your journey to profitability and growth. Understanding these metrics and their interrelationships helps steer your company in the right direction. In this blog post, we’ll explain these terms and provide you with practical insights to help you effectively manage your SaaS financials.

What Are Bookings?

Your bookings are the total value of new contracts your customers sign during a specific period, usually a month or a quarter. When a customer agrees to buy a subscription or service, the whole value of the contract is counted as a booking, even if you haven’t received the money or counted it as revenue yet.

A few important things about bookings you should know about are:

• Bookings show how much money you expect to make in the future from new contracts.
• They help show how well your company is doing in sales and how much it might grow.
• Bookings can come from both new customers and existing customers who upgrade or buy more.
• The booking amount is the total value of the contract, which could be for years, not just the current period.
• Bookings don’t appear directly in your financial statements until you count the money as revenue.

Types of Bookings

• New Bookings (New Business Bookings): The total value of contracts from new customers during a specific period. They show how well you’re doing at getting new customers and growing your business.
• Renewal Bookings: The total value of contracts from existing customers who renew during a specific period. They show how happy your customers are and how well you’re keeping them. 
• Expansion Bookings (Upsell Bookings): When existing customers buy more products, features, or licenses during a specific period. They show how well you’re selling more to your current customers. 
• Deferred Bookings: The part of a contract’s value that you haven’t counted as revenue yet because the subscription goes beyond the current period. Tracking these shows you how much money you expect in the future from contracts you already have.
• Annual Contract Value (ACV) Bookings: The average yearly value of a customer contract. This helps you compare bookings from contracts with different lengths and see the average size of your contracts.

Investors and analysts use bookings to get an idea of how much a SaaS company is growing and gaining customers. Consistently high bookings show that there’s strong demand for your products or services and that you might make more money in the future.

One caveat: Bookings don’t give you the whole picture of your company’s financial health. They do not show the actual money earned during the period. To understand how your business is doing, look at bookings along with revenue, billings, and churn rate.

What Are Billings?

Billings are the total amount of money that you bill or invoice customers during a specific period. This includes the money you earn during that period (revenue) and any money that you have billed in advance for future services (deferred revenue).

Here are some general things you should remember about billings:

• Billings show the total amount of money your company has billed to customers, even if some of that money hasn’t been paid yet or hasn’t been earned yet.
• Billings can include various types of fees, such as one-time charges, recurring subscription fees, and fees for professional services.
• Billings give an idea of how much money a company expects to bring in soon.
• Factors like sent invoices, payment terms, and how long contracts last can all affect billings.
• Billings are different from revenue because some of the money billed may be earned in future periods.

The formula for billings is:

Billings = Revenue + Change in Deferred Revenue

Deferred revenue is money that a customer has paid upfront for a subscription that lasts multiple periods. Your company should record this payment as deferred revenue and then count it as revenue over the length of the subscription.

This metric gives you a sense of your company’s short-term financial health and growth potential. If billings are growing strongly, it can mean that there’s increasing demand for your company’s products or services and that revenue is likely to grow in the future.

To see how well your business is doing financially, look at revenue, bookings, and cash flow as well.

What Is Revenue?

Revenue is the money your business actually earns during a specific period. It’s the income you get from selling your products or services to customers.

At a high level, you should know that:

1. You record revenue when you deliver the product or service to the customer, not necessarily when you get paid.
2. For SaaS companies, revenue is often recognized over time as the service is provided, not all at once.
3. Revenue is what shows up on your income statement and directly impacts your company’s profitability.
4. Investors and analysts look at revenue to see how much money your company is actually making.

In SaaS, there are different types of revenue.

Subscription revenue is the money you earn from customers paying for your software on a recurring basis (monthly or yearly). Professional services revenue is the money you make from services like training, consulting, or implementation that you provide to customers. And lastly, one-time revenue is your income from things like setup fees or other one-time charges.

To calculate revenue, take your product or service price and multiply it by the number of units sold. For a SaaS company, this usually means multiplying the monthly or annual subscription price by the number of paying customers.

If your revenue is growing, it generally means your business is doing well and selling more. However, just like bookings and billings, consider revenue alongside other metrics to get the full picture of your company’s health.

What makes revenue stand apart is that it represents the money you’ve actually earned, while bookings and billings show the money you expect to earn in the future based on contracts and invoices.

Revenue, GAAP, and Financial Statements

Revenue recognition under Generally Accepted Accounting Principles (GAAP) is a set of rules that determines when a company can record revenue on its financial statements. 

Under GAAP, you must meet specific criteria before you’re able to recognize revenue:

1. There must be persuasive evidence of an arrangement between your company and the customer.
2. You must have delivered the service or shipped the product.
3. The price must be fixed or determinable.
4. Collection of payment must be reasonably assured.

Revenue recognition can be tricky because customers usually pay upfront for a service that will be delivered over time. GAAP says that in these cases, you have to recognize the revenue over the period that the service is provided, not all at once when your customer pays.

Example

Here’s how this works in practice:

Suppose a customer signs a one-year contract for $12,000 upfront. Under GAAP, your company can’t just recognize that $12,000 as revenue right away. Instead, it has to spread that $12,000 out over the 12 months of the contract, recognizing $1,000 of revenue each month.

This has a few effects on your company’s financial statements:

1. It smooths out revenue over time instead of having big spikes when large contracts are signed.
2. Your company’s reported revenue for a given period might be less than the total value of contracts signed during that period (bookings).
3. Differences may occur between your company’s reported revenue and its cash flow since you might receive payment upfront but recognize the revenue over time.

GAAP revenue recognition can also impact metrics like Monthly Recurring Revenue and Annual Recurring Revenue. These metrics are based on the recurring revenue that you’re currently recognizing, not the total value of signed contracts.

If you have investors, they’ll pay close attention to how you recognize revenue. Why? If you’re consistently booking a lot of long-term contracts but only recognizing a small portion of that revenue each period, it could be a sign that your company’s reported growth is less sustainable than it appears.

So, while bookings and billings are important for gauging sales performance and future potential, you need revenue recognition under GAAP to understand current financial performance and the sustainability of growth.

Comparative Analysis

All three metrics are interconnected, as changes in one will eventually impact the other two. For example, changes in revenue recognition rules can affect the timing and amount of reported revenue, even if bookings and billings remain constant.

Best Practices in Managing Billings, Bookings, and Revenue

Implement Robust Accounting Software

• Invest in an accounting system that can handle the complexities of SaaS financials, like deferred revenue and subscription billing.
• Having the right software will make it easier to track your billings, bookings, and revenue accurately and efficiently.
• Look for software that integrates with your other systems (like your CRM or billing platform) to reduce manual data entry and errors.

For instance, if you decide to use a cloud-based ERP system to handle your accounting needs. You can use it to automate your subscription billing, easily track your deferred revenue, and generate GAAP-compliant financial reports. Plus, it integrates with your CRM solution, so all your booking and billing data is synced automatically, saving you time and cutting down on errors.

Perform Regular Financial Reviews

• Set aside time each month or quarter to review your financial metrics in depth.
• Look at your bookings, billings, and revenue trends over time to identify patterns and potential issues.
• Compare your actual performance to your forecasts and budgets to see if you’re on track.
• Use these reviews to make informed decisions about things like pricing, investments, and hiring.

Make it a priority to conduct monthly financial review meetings with your leadership team. In these meetings, you can dive into your company’s bookings, billings, and revenue for the past month and compare those results to your forecasts. If there are any concerns, you can discuss them as a team. You can also review your sales pipeline and brainstorm strategies for improving conversion rates and deal sizes.

Have Clear Revenue Recognition Policies

• Work with your finance team and accountants to develop clear, GAAP-compliant revenue recognition policies.
• Document these policies and make sure everyone in your organization understands them.
• Be consistent in how you apply these policies to avoid confusion and ensure your financial reporting is accurate.
• If you’re unsure about how to handle a particular situation, consult with your accountants or auditors.

For example, if you create a revenue recognition policy stating that for annual contracts with upfront payment, you should recognize 1/12 of the total contract value as revenue each month. The policy also covers how to handle setup fees, professional services, and other nonrecurring items. Have your auditors review and approve the policy before sharing it with all relevant teams to keep everyone on the same page.

Use Effective Forecasting Methods

• Develop a data-driven forecasting model that leverages your historical bookings, billings, and revenue data to predict future performance.
• Use your forecasting model to better predict cash flows and make informed decisions about resource allocation, investments, and growth strategies.
• Regularly update your forecasting model with the latest data to ensure your projections remain accurate and relevant.
• Perform scenario analysis to understand the potential impact of different business decisions or market changes on your financial metrics.

You want a model that takes into account your company’s past booking, billing, and revenue trends, as well as factors like your sales pipeline, customer churn rate, and average contract value. 

In addition, you can run scenario analyses to understand how different decisions or market shifts could impact your financial metrics. For example, you might model out how a new pricing strategy could affect your bookings and revenue or how an economic downturn could influence your churn rate and cash flow. 

Leverage Dashboards for Enhanced Visibility and Reporting

• Create visual dashboards that display your financial metrics in an easy-to-understand format.
• Use these dashboards to watch your performance in real time and identify trends or anomalies quickly.
• Share these dashboards with stakeholders across your organization to ensure everyone has visibility into your financial performance.
• Consider creating different dashboards for different audiences (e.g., a high-level dashboard for executives and more detailed dashboards for finance and sales teams).

To give everyone in your company visibility into your financial performance, you can turn to dashboards in Tabs. These dashboards showcase your key SaaS metrics, like outstanding invoices, cash forecasting, average days to pay, and more.

Encourage Cross-Functional Collaboration

• Foster collaboration between your finance, sales, and customer success teams to ensure alignment on financial goals and metrics.
• Encourage your sales team to involve finance in the contract negotiation process to confirm that deals are structured in a way that optimizes financial performance.
• Work with your customer success team to identify opportunities for upselling and cross-selling to drive expansion bookings.
• Collaborate with your product team to ensure new features and offerings are priced and packaged in a way that maximizes revenue potential.

For example, suppose your dashboard shows that your bookings are growing, but your billings are lagging. By collaborating with your sales and finance teams, you might identify that many of your new contracts have longer payment terms, which is impacting your short-term billings. With this knowledge, you could work with your sales team to negotiate shorter payment terms or offer incentives for upfront payment.

Use Customer Relationship Management Software

• Use a CRM system to track and manage your sales pipeline, customer interactions, and contract details.
• This system is excellent for recording bookings as deals are closed and tracking the status of each contract over time.
• Integrate your CRM software with your accounting and billing systems for data consistency and to reduce manual data entry.
• Leverage your CRM data to analyze sales performance, identify bottlenecks in your sales process, and forecast future bookings and revenue.

By leveraging your CRM data, you might identify that a particular customer segment has a higher churn rate than others. You can develop targeted retention strategies for this segment to decrease churn and protect your recurring revenue.

Concluding Thoughts

Mastering the complexities of SaaS financials comes down to tracking key metrics, implementing best practices, and using the right tools. By following the strategies outlined in this blog post, you can gain a clearer picture of your company’s financial health and confidently navigate the path to profitability and growth. 

Tabs — the industry’s most adaptable B2B billing and revenue management platform — can help you simplify your financial management and achieve your goals. Book a demo today to see how Tabs can support you on your journey to success.