Revenue, billing, and collections are similar, yet very different. Although they all relate to the same thing (in different ways), This article goes into detail about the difference between bookings vs revenue vs billings.
Let’s look at this example data set to illustrate what I mean.
The way that we’re going to simplify this is by considering a customer who pays for an entire year upfront. In reality, there are two ways in which companies bill their customers: either the company commits the customer to pay for a full year and then bills them monthly or they offer customers the option of committing themselves to pay a one-time fee but still being billed on a monthly basis. Here are the distinctions between bookings vs revenue vs billings.
A booking is a contract that a customer signs with you, and represents their commitment to spend money over time. The commitment usually comes when they sign up for your service in exchange for what you offer them.
Part of understanding the difference between bookings vs revenue vs billings is the number of bookings. It is important because it represents the overall health of sales and business growth. There’s no universal definition for booking, but they’re generally considered to be an agreement with a customer who agrees to buy something at some point in time.
Bookings are a crucial metric for all subscription-based businesses, especially startups that don’t yet follow best accounting practices. Click To Tweet
Bookings provide such companies with an estimate of how much revenue they can expect and give marketers insights into what type of customers to target.
So for example, if a customer signs up to pay $100 per month and commits to paying the full 12 months (a total of $1,200), you can consider that as bookings. Your monthly booking is the sum of all closed deals with different prices and durations.
A booking is a way to visualize the committed value of all contracts over time. It also shows how much money should be flowing into your business and market response/demand for that product or subscription.
For the sake of simplicity, if you take our sample data set for this question then it would be true that your bookings are equal to all contracts booked. However, what matters is whether or not customers will use their service as per contract length.
Types of Bookings
In understanding the difference between bookings vs revenue vs billings, it’s important to know the types of bookings as well. SaaS businesses have three types of bookings: new bookings, upgrades/expansions, and renewals. But there are several other types that they can use to predict the value upfront. The most common factors used by these companies include contract length, customer churn rate, and retention rates.
A new booking is defined as a customer who has subscribed to or been provided with any additional services from the company.
Renewal bookings: This is an estimate of how many contracts will be renewed by the customer at some point in time. It’s calculated either when a renewal request has been received or on the date that they are set to renew.
Bookings that are generated by upselling or upgrading a subscriber’s account. For example, if someone wants to upgrade from the Pro plan ($500) to an Enterprise Plan ($2,000), they have to sign a new contract @ $24,000year which will be referred to as an upgraded booking.
When making an offer, it is important to be aware of the difference between ACV and TCV. Click To Tweet
Annual Contract Value (ACV) bookings are applicable in the case of multi-year contracts that last for at least one year with a minimum committed revenue booking. On the other hand, Total Contract Value Bookings take into consideration how long your contract lasts even if you have shorter commitments.
In understanding the difference between bookings vs revenue vs billings, it is not just recurring subscriptions that generate revenue. Some businesses have a one-time fee for services such as training, installation, and discounts.
Revenue is a standard GAAP term and it’s the money that comes in through core operations. For SaaS, these are typically cloud-based services according to contracts or service level agreements (SLAs). Revenue means there will be at least some payment for those delivered services because of an initial contract.
When it comes to the difference between bookings vs revenue vs billings, if you are providing a service, the revenue is when that service is provided. If it’s in exchange for your product or service, then at least some of that money should be accounted for as income. For example with software-as-a-service products like subscriptions to our yearly plans, if you’re managing things on a monthly basis each month will recognize 112th of the total value.
Service providers usually get paid for the work they do by having a portion of their contract value recognized each month/quarter/year. If these payments are spread out over multiple years, deferred revenue can become problematic if there is not enough money coming in to cover it.
If we consider our sample data set, your revenue would be the sum of each customer’s monthly contribution. Keep in mind that this doesn’t take into account churn or contraction.
The term “billings” refers to the time when you actually collect money from your customers. Billing occurs at two points: it can happen as soon as a customer books with their credit card, or after they pay monthly and commit for 12 months (even if that payment is not due until later). If you receive payments but haven’t delivered services yet, those revenues remain liabilities.
From our data set, we found that if a customer subscribes to the yearly plan they will pay for 12 months upfront and be billed for the total contract value. If subscribed to monthly plans, customers are charged every month.
Recognized vs. Deferred Revenue
Recognized revenue is the money that a company earns after providing services and having been paid by customers. Recognized revenue can be in one lump sum or it could happen gradually depending on how much of the contract has been fulfilled. For example, if you have monthly payments for $1,000 to provide these services then recognized revenues will also come once per month.
In the difference between bookings vs revenue vs billings, you also want to pay attention to deferred revenue. That’s money you already billed and it is on your bank account, but cannot be recognized as revenue yet because the product or service has not been delivered or used by a customer. If you usually close deals in one year, then there will likely be high amounts of deferred revenues.
When a business collects the payments as per contract in advance, they become liable for those services even though it has not been delivered yet. That’s because keeping track of this many transactions can be complicated if recognized and deferred revenues are not treated separately.
We can conclude that in our sample data set, we are only looking at the total amount of money made.
Bookings are not a standard GAAP term, but they offer insight into the company’s performance and health. Bookings cannot be included in financial statements because of their temporary nature, so businesses encourage salespeople to get customers to pay upfront by offering discounts.
Revenue recognition is a key concept for any company, but it can be more complicated in the software world because of recurring revenue. However, there are many similarities between GAAP and other sectors so understanding these concepts will help you to recognize your own business.
Metrics vs. the Reality
Companies should be transparent and consistent with their reporting so that the financial information is simple to understand. The more complex a company’s finances are, the harder it will be for them to report accurately.
To avoid making the same mistakes with metrics, businesses should think about how they want to report their data. For example, if you are reporting on bookings for a company and do not have good long-term numbers available yet it might be better to hold off on disclosing that metric rather than doing so prematurely. Similarly, when talking to investors or other external parties make sure your financial reports are clear and concise because this minimizes questions of validity.
SaaS businesses should not see accounting and finance as a burden, but rather an opportunity to improve their business. These tools are only useful when the company knows how they work in tandem with other metrics.
In SaaS, billing upfront means that revenue is like bookings. However, if you bill monthly then it will be like a recurring revenue stream (like the way your bills come in). It all depends on what type of business model and product/service you have.
There are many interesting relationships between these metrics. One of them is the book-to-bill ratio, which can be seen in industries like advertising, where not all booked business will turn into revenue because it’s impossible for some orders to deliver.
It’s important to keep track of all these metrics, especially your revenue. Click To Tweet