Given the more than 1,000 accounting and finance terms, it’s easy to understand why there may be some discrepancies. Although many of the terms are self-explanatory, others such as bookings vs billings vs revenue are frequently misunderstood and used interchangeably. Let’s demystify the terms, discuss their importance for B2B software-as-a-service (SaaS) organizations, establish when and how they are used, explain their impact on revenue and cash flow, and uncover real-world examples.
Cutting Through Financial Jargon
What exactly are bookings vs billings vs revenue? Let’s start with the definition of each.
SaaS Bookings
An indicator of future revenue growth, this forward-looking metric represents the start of the transaction or subscription. At this point, the customer agrees to purchase your products, services, training, renewals, etc., and commits to making payments for the duration of the contract.
For example, a $24,000 – 12-month contract is a ‘booking’ and cannot be considered immediate revenue.
SaaS Billing
This is the amount you will collect for the products and services provided during an accounting period. A good representation of cash flow, the billing period spans a certain time period like a month, 6-months, a year, or longer. This metric includes products, services, recurring subscription fees, and other charges, such as consulting and training.
SaaS Revenue
Revenue recognition occurs once the products and services reach the customer, i.e., the obligations have been fulfilled. For subscription-based SaaS companies this means the revenue is recognized at a predetermined rate over the life of the subscription.
Say the SaaS company bills the customer in advance for a year’s subscription, the business earns (recognizes) the revenue over the course of the year – as the contracted services are delivered. This is per GAAP rules, which indicate that revenue can only be recognized once it has been ‘earned’.
While these metrics enable SaaS companies to monitor, understand, and forecast business performance, each provides a different aspect of the organization’s performance and financial health. However, when analyzed in combination, they provide a picture of the company’s current sales, overall financial strength, future growth prospects, and cash flow. For example, a surge in bookings is a strong indicator that its billings and revenue will also increase.
Given that these three metrics play a distinct and significant role within a company’s financial landscape, let’s use an example to better understand their interplay.
Let’s Dig in Deeper with Examples
Our fictitious B2B SaaS provider sells three software plans – Basic ($500/month), Pro ($1,000/month), and Enterprise ($1,500/month). For simplicity, we’ll say that each of their 4 customers commits to a one-year subscription. 2 of the customers make the full payment in advance, while the other 2 pay monthly.
Bookings:
Regardless of how the customer pays for their subscription, bookings are the sum of all closed deals for the month.
- April bookings equal $6,000
- May bookings equal $12,000
- June bookings equal $24,000
Billings:
This figure includes the total amount billed each month. For customers paying monthly, the figure is the invoice amount. For customers paying in advance the bill is the total contract value. In this scenario, April billings equal $6,000, May billings equate to $1,000, and June billings are $18,500.
Recognized Revenue:
This figure includes the total amount paid and ‘earned’ each month. For customers that pay in advance, the company will include the amount of ‘earned’ revenue for the month – in this case 1/12 of the total subscription payment. Recognizable revenue for April is $500, May is $1,000, and June is $2,000.
To make comparisons between the amount of bookings vs billings and revenue easier to see, let’s look at it in a table format.
As you can see, each of these figures represent different financial aspects of the company. While bookings provide the total purchase price and reflect sales momentum, billings show the expected monthly cash flow, and revenue highlights the amount the company actually earned during the month. When it comes to recognizing revenue, revenue can only be recognized when the conditions of ASC 606 are met, which adds a bit more complexity to financial processes.
What About Deferred Revenue?
Let’s take this one step further and discuss money that is billed and paid, but is not recognizable income. Deferred revenue (also called deferred income, unearned revenue, or unearned income) in accrual accounting is applied to payments received for products and/or services that have not yet been completely delivered.
The amount of deferred revenue is recorded as a liability until delivery is made, at which time it’s converted into revenue. For example, a SaaS provider sells an annual subscription for $12,000, and the entire contract is invoiced and paid in advance. The $12,000 is considered deferred revenue, and the company recognizes $1,000 each month as services are rendered.
While the above provides fairly straightforward examples, it’s easy to see how bookings, billings, and revenue recognition can quickly become complex, especially when customers cancel subscriptions, renew subscriptions, upgrade or downgrade plans, purchase additional products and services, etc.
The Impact of Bookings vs Billings vs Revenue Recognition on Revenue and Cash Flow
Bookings represent the customer’s commitment to pay for products and services and don’t directly impact financial reports. Billings affect the balance sheet (accounts receivable, deferred revenue, and cash balance). Revenues are recognized according to the revenue recognition principle, meaning that revenue is recognized on the income statement in the period when earned – not necessarily when cash is received.
Bookings include new customers, renewals, and upsells and reveal potential weaknesses, as well as areas for growth. For example, a decrease in bookings may indicate waning market interest or it may be an early sign of potential issues within the sales process. When it comes to billings, they provide an essential measure to the company’s ability to generate cash. Trends in billings provide critical insights into the financial health of the company, its growth or decline, and provides a cash flow measure.
Revenue recognition signifies that the company has fulfilled its obligations to the customer and knows the exact amount of income generated. However, by analyzing all three metrics a comprehensive picture of the company’s current and future performance can be determined.
Bookings vs Billings vs Revenue Recognition: Key Points
- Bookings are the total value of signed contracts.
- Billings represent the amount billed to customers.
- Revenue is the money earned once the purchased products and services have been delivered.
- Upfront payments can improve the company’s cash flow.
- Multi-year subscription contracts may increase bookings, but will not immediately contribute to revenue.
- Bookings don’t always result in receiving the full amount of revenue reflected in the contract. Subscriptions can be canceled, invoices may become uncollectible, or the company may encounter difficulties in delivering the products or services.
- An increase in bookings signals strong market demand. A decline in bookings may indicate waning customer interest, which will likely result in a decline of revenue.
- Revenue can only be recognized once all contractual obligations are met.
- While deferred revenue shouldn’t be considered either a positive or a negative, deferred funds do not equate to available cash.
Don’t Let Revenue Slip Through the Cracks
Recognizing the relationship between bookings vs billings vs revenue is the foundation to managing cash flow and accurately predicting the future financial health of the business. As such, it’s important for the finance team to carefully track these metrics. However, manually calculating these intricate metrics is not only time consuming but prone to errors.
BillingPlatform’s cloud-based platform provides everything needed to automate the entire quote to cash process, allowing B2B SaaS companies to manage finances with greater efficiency, accuracy, and control. Our complete solution streamlines revenue management to allocate, reconcile, monitor, and recognize revenue for any pricing model, billing approach, or promotional offer, while staying compliant with ASC 606 and IFRS 15.
With BillingPlatform, you’re able to accelerate the close process with real-time subledger transactions that integrate into downstream ERP and accounting systems. Are you ready to streamline the billing cycle, reduce manual errors, minimize revenue leakage, and gain visibility into the financial data that will enable you to make more informed business decisions? We can help!
