Picture this: you get a new client on board, and this client signs a 12-month $20,000 deal. Now that you’ve closed the deal, should you sit back and consider this money in your pocket?
The answer is no — while your client has already signed for $20,000, this doesn’t mean that you’ve actually earned this sum of money.
This raises the question: how do you tell whether you’ve earned a sum of money that your client has signed or paid for? To do this, you’ll have to understand the differences between bookings, billings and revenue, and what each of these mean for your company. If you’re not 100% sure about the differences between these three terms, read on to learn more.
Bookings are pretty self-explanatory – these refer to when a customer “books” your product or service, and commits to spending money with you. When someone signs up for a paid plan with your SaaS, that counts as a booking.
Why are bookings important? By tracking your bookings, you measure whether you’re doing a good job at conveying your product’s value to consumers, and converting your leads into paid users. Make sure to analyze both your number of bookings and the value of your bookings – ideally, you should be working towards generating more bookings, and increasing the value of your average booking.
If your bookings are starting to wane relative to your revenue, then this indicates that you might run into cash flow problems a few months down the road.
Take this sample data set for example:
To calculate your monthly bookings, simply look at the total value of the contracts that you’ve booked in a specific month.
For December, this adds up to a total of $1960. For January, your total bookings are $2560.
Next up, billings occur when you collect your customers’ money. This means that your billings are largely influenced by whether you bill your customers on a yearly basis (and collect an entire year’s worth of fees upfront), or whether you bill and collect money on a monthly basis.
Why are billings important? Your billings drive your cash flow. If your bookings are healthy, but your billings are significantly lower, your business might look like it’s doing well on the revenue front, but it’s possible that you’ll run into cash flow problems.
It’s common for companies to get an influx of business (ie: bookings), and suddenly need to hire to cope with the additional workload. Here, companies who haven’t billed their customers upfront might be caught in a bind. If your SaaS business requires a fair bit of manpower (for development, onboarding or customer support), think about ways to have customers pay more upfront.
Let’s look at that same dataset from earlier. To calculate your billings, take into consideration the amount paid and whether the client is paying per month or per year:
For December, your billings would amount to $1960. In January, your billings would either be $2560 (assuming that Customer B did not cancel his subscription) or $2400 (if Customer B churned).
Finally, revenue refers to when you recognize the billings as revenue and you’ve actually provided your product/service to a client. Since you’re a SaaS business, you’d recognize your revenue over the lifetime of a subscription, NOT at the start when your customer books or gets billed for their purchase.
Why is revenue important? If you simply look at your bookings and billings and use this to benchmark the performance of your business, you’re essentially relying on inflated numbers, and this may lead you to make the wrong decisions. The more accurate way to go about this is to refer to your revenue, which is the actual amount that you’ve earned (in return for providing your product/services) from your customers.
Let’s look at that same dataset from earlier. To calculate your revenue, break down each customer’s contract value per month, and add up all the values for a given month:
Add up the figures in the Total Revenue column, and you’ll see that you’ve earned $310 worth of revenue in December, and $510 worth of revenue in January. Although your recognized revenue is closely related to your MRR, it is not the same – we’ll dive in the difference between MRR and Recognized Revenue in a separate article.
A final word on SaaS bookings vs billings vs revenue
That’s the basics of your bookings, billings and revenue – but stay tuned to our upcoming guide, where we dive into the nuances of these three terms, and explain how to deal with cancellations, upgrades, and other situations.
If you find it a chore to work out and keep track of your bookings, billings and revenue, consider outsourcing this to a Virtual CFO from ABEL. Our Virtual CFOs can help you do the heavy lifting when it comes to your finances, and this will allow you to focus on growing and expanding your business.SCHEDULE A FREE CONSULTATION