Understanding the distinction between bookings, billings, and revenue is important — especially if you're looking for growth capital.
As a SaaS entrepreneur, understanding the distinction between bookings, billings, and revenue is crucial — especially if you’re hoping to secure debt financing to help grow your business. In this short blog post, we cover the difference between them and describe five common pitfalls entrepreneurs often find themselves in when analyzing and reporting these numbers.
Bookings represent the total amount of contracts signed during a predetermined period.
Billings represent the total amount invoiced to the customer.
Revenue represents the billings received when the contract is fulfilled (i.e., the service or product has been delivered).
Bookings, Billings, and Revenue
Bookings in a SaaS context represent the total value of contracts or orders for your product or service over a specified period. This includes new sales, renewals, and upgrades. Bookings are recognized when a contract is signed or an order is received, independent of when the revenue is realized.
Billings represent the total amount invoiced to the customer. For example, if you book a 3-year contract for $30,000 that bills annually, your annual billings are $10,000. However, if you bill $10,000 for the year and the customer pays you promptly, you’ll have the cash in your account, but you can only recognize a portion of it as revenue.
Revenue is the actual cash received from customers during a certain period. It is recognized when the service or product is delivered and invoiced to the customer, such as monthly or annual payments for the service.
In January, a customer purchases a 3-year plan at $12,000 per year that bills quarterly ($3,000 per quarter). According to GAAP standards, revenue is only recognized once it is earned (i.e., the service or product is delivered). If there is a problem with delivery, revenue is affected. The bottom line: Bookings and billings do not always equate to revenue.
|Total Year 1
|Total Year 2
|Total Year 3
*Revenue is recognized monthly, as earned.
Common Missteps When Tracking Bookings, Billings, and Revenue
Confusing bookings with revenue can lead to significant financial missteps. However, they are often mixed up in early and growth stage SaaS businesses which causes problems when the time comes to do due diligence on financing arrangements.
Here are some of the most common mistakes:
1. Not Distinguishing between Bookings and Revenue
Bookings provide insight into future revenue potential, while revenue reflects the company’s current cash flow. Confusing the two can make forecasting unreliable, resulting in inaccurate revenue projections and unrealistic growth targets.
Mistaking bookings for revenue can also skew financial reporting, leading to misjudgments about the company’s financial health. This confusion often results in overestimated revenue and cash flow, unreliable forecasts, and increased financial risk due to resource misallocation and overvalued assets.
2. Overlooking Cancellations
When companies focus heavily on bookings, they often ignore the impact of potential cancellations when looking at their current and future revenue. In addition, there is often an assumption that customers will renew their contracts upon their expiry — but that is not always the case.
Any amount of churn can greatly affect revenue projections.
It also affects how potential investors or lenders assess the risk. For example, when TIMIA analyzes churn from cancellations, we consider it relative to current revenue (revenue churn) and relative to the total number of customers (logo churn). A large customer that cancels their subscription can greatly impact your revenue.
It’s important to keep this in mind, as you never know what may happen with new bookings and renewals down the road.
3. Ignoring the Effect of Discounts
Discounts significantly affect revenue yet are often overlooked in bookings calculations. If your team makes a booking based on a discount but enters it into the system at full price, you will create unrealistic revenue projections. Regular training and audits are necessary to ensure your salespeople accurately record revenues if you offer discounts.
RELATED CONTENT: Advantages and Disadvantages of Cash vs. Accrual Basis Accounting
Importance of Accurate Tracking of Bookings versus Revenue in Debt Financing
For SaaS companies seeking debt financing, the distinction between bookings and revenue becomes even more crucial.
Lenders like TIMIA Capital prioritize historical financial health, focusing on actual revenue rather than future bookings. As such, it’s critical that companies have a robust understanding of these metrics. It not only ensures accurate financial reporting but also strengthens a company’s case for debt financing by showcasing reliable cash flow and realistic revenue projections.
If you have any questions about bookings versus revenue — and how they affect debt finance applications — contact our team for more information.
To explore TIMA’s offerings tailored for cleantech startups, contact our team for a chat.Back to top