When I was building my first SaaS company, I spent way more time than I’d like to admit trying to accurately calculate and analyze our sales and revenue performance in addition to the rest of the metrics we used to steer the company. Nearly 15 years later, gaining a deeper understanding of bookings, billings, and revenue might be one of the most important things I've learned.
I recently spent some time during SaaS Metrics Palooza talking about this with Ray Rike, founder of RevOps Squared, who organized the inaugural event. We agreed this would be a great topic to explore with the audience because it’s still such a nuanced area many people struggle to understand.
For those who weren’t able to join my presentation at the online event, I wanted to spend some time here talking about the difference between bookings, billings and revenue and why their differences matter to growing SaaS businesses.
What Are Bookings in a SaaS Company?
“Bookings” most often get confused with “revenue” but they’re each distinct terms. At a foundational level, a booking is simply a sale amount. It's the total amount of money a customer agrees to pay you with a signed contract or the equivalent. This means that they have formally agreed to the terms of your service and the pricing. So a company’s total bookings figures should equal the combined values of all committed customer contracts executed in a specific period.
There's no accounting standard that dictates how to report bookings numbers. Two otherwise identical SaaS companies might view and track bookings differently. Typically, you see a SaaS company treating bookings consistently so they can use their data to benchmark against in the future and to extrapolate how each metric might evolve as the business scales.
For instance, one thing I often hear debated is the date of when the booking should be counted. In other words, at what point can you categorize the price of a contract into bookings numbers you report in a given period? For most companies, bookings figures are counted on the date the customer contract is considered fully executed. For companies who use Salesforce as their CRM, I always advise that the close date of the opportunity should match the booking date.
Whichever way your organization chooses to keep track of bookings, maintaining consistency across time is your most important factor, as bookings are the best leading indicator for the future state of your business.
Some questions I can now answer confidently in our business by consistently tracking bookings are, “How are we trending on bookings versus our bookings budget,” and “how are we trending on bookings relative to our bookings quotas?” The answers to these are invaluable to our ability to guide the company forward.
What Are Billings in a SaaS Company?
Billings are the amounts of money that you bill your customers for the products and/or services your company delivers over a period of time. Tracking billings accurately by closely managing your various customers’ contractual billing terms and payment frequencies allows you to more clearly understand, predict, and manage the company’s cash inflows.
You might choose to require customers to pay on the dates they receive each invoice (a.k.a. “upon receipt”), or you might offer them net payment terms (i.e. Net 15, Net 30, etc.), which is essentially extending a number of days’ credit to your customers before their payments come due. In terms of billing frequency, you may require customers to pay all at once, or to pay annually, semi-annually, quarterly, or monthly.
Having predictable customer billing cycles is a major priority at Place because it helps us know when we’re likely to receive cash in the bank account, which is crucial to operating the company. If you're running a super early-stage startup, cash is probably limited and critical. Keeping a careful eye on cash flow can mean the difference between success and failure.
There are some ways to leverage contract terms to drive improvements in your company’s immediate cash position. For instance, if you need more cash in the door sooner, you may incentivize customers by offering them a lower price in exchange for them agreeing to pay annually, rather than quarterly. If a majority of your customers already pay annually, you might consider offering them discounts to commit to additional years, or even to pay for those additional years up-front.
If you offer monthly payment options to your customers on yearly agreements now, you might even consider eliminating that option from future contracts. As you grow toward later stages and have more cash in the bank, you can begin to leverage different payment terms to attract more clients and grow bookings faster.
Accurately tracking billings gives you more visibility, not only into how managing cash flow will affect your business, but also into the health of your relationships with customers and what you can do to improve them.
Now, let’s tie this all together with “revenue.”
What is Revenue in a SaaS Company?
Revenue is an accounting term and a metric that must be calculated in the U.S. according to Generally Accepted Accounting Principles (GAAP). There are a whole set of “rules” or standards required by law to be used when reporting revenue to government agencies like the IRS and the SEC.
In recent years, the Financial Accounting Standards Board (FASB) introduced guidance, in the form of a standard called ASC 606, for how to calculate, or “recognize,” revenue earned from software products. Because of these standards and the possible legal implications of non-compliance, it’s super important to maintain compliance when reporting your company’s revenue.
In accrual-basis accounting rules, earned revenue is income that you've earned when your company has completed specific performance obligations to your customers, such as providing a full month of access to your SaaS product. When your customer has access to your product as you’ve committed to delivering it in your contract, you can recognize or record the appropriate revenue amount each month.
Between bookings, billings, and revenue, the last is the only figure that actually lands within your typical 3-statement financial reporting package. Specifically, earned revenue figures are meant to be displayed on your profit and loss statement, also called the P&L or income statement. And deferred revenue is something that lands on your company’s balance sheet.
To tie this all together, we’ll walk through an example. Let’s say your sales team wins (or “books”) a sale on a two-year term with a total contract value of $24,000. The payment frequency is “annual,” and payment terms are “due upon receipt.” That means your company will invoice the customer on the contract start date, and the customer will immediately make their first annual payment of $12,000. So the bookings amount is $24,000, while the billings amount for the first year is $12,000, and the revenue amount that’s been recorded in the accounting general ledger under the “deferred revenue” account is $24,000.
For any SaaS subscription contract, total revenue is an amount that’s recorded in the accounting books as “deferred” at first, and then one month’s worth of revenue is recognized each month the customer has access to their subscription. Since your team booked a sale, but the customer hasn’t yet accessed the software, all $24,000 in revenue is recorded as “deferred.” It’s not until the accounting books are closed for the first month the customer has access to your product when one month’s worth of revenue (~$1,000) gets moved from the deferred revenue account to the revenue account. This means the revenue for that month has been earned, or “recognized.”
Because these “deferred versus earned” revenue nuances are standardized accounting practices, there's not much room for interpretation of how this works by your investors, regardless of what type of SaaS company you lead. Anyone can look at your earned revenue, and as long as you're following GAAP, they can feel comfortable with how the numbers are being presented.
Bookings, billings, and revenue are exceptionally important metrics to help you measure and manage the overall health of your business. With these and a deluge of other metrics, you’ll want to be clear about which ones you’re tracking and why, as these are the things investors will pay very close attention to.
There are so many metrics you can look at that it might cause you to go into metrics overload. So, my advice is to listen to what your peers, investors, board, and experts like Ray Rike are saying about why certain metrics matter to them, and then begin to build your processes and capabilities to measure the right ones carefully. Also critically important is to ensure that everyone on your team understands the reasons behind measuring each metric correctly, and that you're all operating on a shared understanding of the data and assumptions.
For more information, you can check out my full presentation from SaaS Metrics Palooza here.