What Are Bookings, Billings and Revenue? SaaS Revenue Recognition Models (2024)

Tracking and predicting business performance can be challenging for any company. That’sespecially true for fast-growing software-as-a-service (SaaS) companies and startupsoperating under rapidly changing business conditions. Bookings, billings and revenue arethree key financial metrics that allow companies to monitor, understand and forecast theirbusiness performance. Each sheds light on a different aspect of the company’sfinancialhealth. When combined, they provide insights into the company’s current businesstrajectory,future growth prospects and cash flow.

What Are Bookings, Billings and Revenue?

Bookings, billings and revenue are three important measures of a company’s sales andoverallfinancial performance. Each of these businessmetrics highlights a different facet of the company’s financial health.Here’s howthey differ:

• Bookings are the value of contracts signed during an accounting period.For SaaS companies, bookings are the total amount that customers have committed to payfor subscriptions and other services, such as training and implementation, throughoutthe life of their contracts, which can span multiple years. Thus, bookings are a keyindicator of future revenue growth.
• Billings are the amount of money the company has billed customers forduring the accounting period. Billings are typically a good indicator of thecompany’scash flow because they represent money the company expects to receive soon. For SaaScompanies, billings include recurring subscription fees, plus any charges for otherservices, such as consulting.
• Revenue is the amount the company has earned during the period. Thisoften differs from the amount billed. Companies using accrual-basedaccounting earn revenue as they deliver the services or meet other obligationsspecified in the contract — not when they bill customers or when they get paid.Take theexample of a SaaS provider that bills a customer in advance for a year’s SaaSsubscription. The supplier only earns that revenue gradually, over the course of theyear, as it delivers the contracted services. Each month, its revenue from the contractis one-twelfth of the annual subscription cost.

3 Key Sales Metrics

Together, bookings, billings and revenue provide a picture of the company’s currentsales,overall business strength, growth prospects and cash inflows. Managers, investors andlenders closely scrutinize these metrics to understand the company’s financialperformance.For example, a huge surge in bookings is a strong indicator that the company will growrapidly and that its billings and revenue will increase.

However, the fact that bookings, billings and revenue tallies can differ greatly from eachother means that groups within the company may have divergent views of the business’sfinancial performance. This can result in misunderstandings and poor business decisions ifthe relationship among the metrics isn’t clearly understood.

It’s also important to examine other financial metrics togain a fuller understanding of a SaaS company’s performance. For example, a SaaScompany’sincome may include regular payments derived from a subscriptionmodel, as well as one-time payments for system setup or training. Both types ofincome are reflected in the company’s total bookings, billings and revenue numbers.Managersand investors often focus on the recurring subscription payments because they represent themost sustainable source of cash.

Customer churn — therate at which a company loses customers — is another closely watched metric. If acompany islosing customers faster than it’s winning new ones, it’s often a sign ofproblems. Forexample, customers may be leaving because they’re dissatisfied or because newcompetitorsare tempting them with a superior product. A high churn rate may be a warning sign thatbookings, billings and revenue will fall in the future.

Key Takeaways

• Bookings, billings and revenue are three important sales metrics for SaaS providers andother companies. Each highlights a different aspect of the company’s financialhealth.
• Bookings are the total value of signed contracts. They are a measure of future incomeand business growth.
• Billings enumerate the amounts billed to customers. They are a predictor of cashinflows.
• Revenue is the money earned by delivering products and services. It includes recurringsubscription revenue, as well as one-time charges.
• By examining all three metrics, managers, investors and lenders can gain a more completepicture of a company’s current and future performance.

Revenue Recognition Explained

Revenuerecognition is an accounting principle that determines how companies record revenueand report it in their financial statements — specifically, when the company hasearned it.Typically, that means the point at which the company has fulfilled its obligations to thecustomer and knows how much it will receive in return — for example, after the companyhasdelivered a product that the customer ordered for an agreed-upon price. The goal of revenuerecognition is to accurately and consistently represent the company’s financialperformance,which is especially important for SaaS companies that may collect the full price of anannual subscription up-front but can only recognize a month’s worth at a time.

Accounting Standards Codification (ASC) 606, part of the Generally Accepted AccountingPrinciples (GAAP), provides standardized guidance for how U.S. companies should recognizerevenue. It involves a five-step framework:

1. Identify the contract with the customer, in which all parties approvethe contract and agree to meet their obligations, among other criteria.
2. Identify the performance obligations in the contract. For a SaaSprovider, a sales contract might include a two-year commitment to supply a SaaS softwaresubscription, plus implementation and training fees.
3. Determine the transaction price as detailed in the contract.
4. Allocate the transaction price to the performance obligations.Determine how much of the total contract value is allocated to the softwaresubscription, to training and to implementation.
5. Recognize revenue as the performance obligations are satisfied. A SaaSprovider recognizes revenue as it is earned for each item defined in the contract. Forexample, it might recognize the revenue for training and implementation when it hasfinished providing those services. It recognizes a portion of the subscription revenueat the end of every month over the two-year life of the contract.

What Are Bookings?

Bookings are a forward-looking metric that shows how much revenue the company expects toreceive in the future. Bookings represent the value of customer contracts signed, even ifthe company hasn’t yet received any payment or delivered any products or services.Bookingsare typically recorded as soon as an agreement is signed and include deals with newcustomers, as well as contract renewals. Each contract may include multiple types ofproducts and services delivered over different periods. For example, if a company wins atwo-year contract worth $10,000 and a five-year contract worth $40,000, its total bookingsare $50,000.

It’s important to remember that bookings don’t always result in receiving all ofthe revenuespecified in the contract. For example, a customer might cancel before the end of thecontract or be unable to pay for other reasons.

The Importance of Bookings in SaaS

Bookings are a critical metric for SaaS providers because they provide a view of thecompany’s likely growth trajectory. Startups, for example, may have relatively littlerevenue in their early lives. But if they offer compelling products, customers may bewilling to commit to contracts that will bring in significant revenue over the long term.The company’s bookings are a window into the company’s success in customeracquisition andexpected pipeline value.

As a SaaS company becomes more established, trends in bookings can help the company improveits key assumptions about longer-term trends in revenue and create an achievable operatingplan. If bookings rise, revenue will usually increase later, as the company delivers thecontracted services. Bookings growth often signals a strong market demand for thecompany’sproducts. Conversely, a decline in bookings may be a warning sign that the company is havingproblems attracting new customers or getting existing customers to sign new contracts, sorevenue is likely to fall in the future.

What Are Billings?

Billings are the amount a company bills its customers each period. Billings provide a view ofthe business from a cash flowperspective because companies generally expect to receive payment soon after theybill their customers. Billings aren’t guaranteed to result in equivalent cash inflows,however, because some bills may be uncollectible. In addition, the amount billed by acompany doesn’t always reflect all the products or services it has provided during theperiod. For example, it may bill customers in advance for services it will provide later.

The Importance of Billings in SaaS

Billings are a critical measure of a SaaS’s ability to generate the cash needed to fundeveryday operations and business growth. Billings can include charges for a variety ofdifferent products and services. Recurring charges for SaaS subscriptions are often the mostimportant component of a bill. Companies watch for trends in these recurring charges becausethey reflect the health of the company’s core business; steady growth in recurringbillingsis a sign that the company’s customer base is expanding and/or that customers aresubscribing to more of the company’s products. Some SaaS companies accelerate cashflow bybilling in advance for the full amount of their annual subscriptions. Billings can alsoinclude charges for other services, such as initial fees for training or product setup.

What Is Revenue?

Revenue is themoney that a company earns from the sale of goods or services. Revenue is defined as thetotal value of sales minus any returns, discounts or other allowances. For any company,revenue is one of the most critical measures of financial health and performance. It’sthefirst item listed on the company’s incomestatement, which is why revenue is also known as the “top line.”

Organizations using accrual accounting recognize revenue when it has been earned, regardlessof when customers are invoiced or when payments are received. A company is considered tohave earned revenue when it has delivered the corresponding product or service. Unlikebookings and billings, revenue is a GAAP metric. Companies that need to follow GAAPaccounting guidelines, including publicly listed companies, need to follow theguidance outlined in GAAP ASC 606 when reporting revenue. The guidance is designed to ensurethat companies report revenue in a way that’s consistent with and comparable to othercompanies.

The Importance of Revenue in SaaS

For SaaS providers, revenue is a critical measure of their ability to create a solid,sustainable business. That’s why revenue is a closely watched metric for managers,investors, lenders and analysts. Lenders and investors, for example, scrutinize acompany’srevenue when determining whether to provide funding.

In contrast to bookings, which highlight the company’s future potential, revenuemeasuresgrowth that has already occurred, because companies record revenue only when they haveearned it. For example, SaaS providers record recurring subscription revenue at the end ofevery month in which they have earned the revenue by delivering the corresponding services.If they bill customers for a year’s subscription in advance, they spread the revenueoverthe year.

For many SaaS companies, the most important component of the revenue model is the steadyrevenue generated by subscriptions. SaaS companies often have customer contracts of varyinglengths, so they track revenue trends by calculating the revenue generated each month oreach year, known respectively as monthly recurring revenue (MRR) and annual recurringrevenue (ARR). These metrics provide a consistent way to track trends in subscriptionrevenue regardless of the length of individual contracts.

How Businesses Report Bookings, Billings and Revenue

For SaaS companies, bookings, billings and revenue are all important metrics. Depending onthe company’s sales and operating model, the three metrics can differ widely. Forexample, anew company with an innovative product may win a large value of bookings, even though it haslittle or no revenue at all. So, it’s important to analyze all three metrics to get atruepicture of the company’s performance.

When a company bills in advance for services that it hasn’t yet delivered, it recordsthevalue of the as-yet undelivered services as deferred revenue, which isa liability on the company’s balance sheet. Takethe example of a company that bills a customer in advance for a $12,000 annual subscription.Until the company starts delivering the subscribed services, the contract value isconsidered deferred revenue. The company earns the revenue from that contract over thecourse of the year, so, at the end of each month, it records $1,000 in revenue and reducesthe deferred revenue by the same amount.

It’s also vital for companies to track every contract at each stage, from booking tobillingand recording revenue, so that their SaaS accountingrecords truly capture what’s happening in the business operations and making sure thatnomoney slips through the cracks. Accountingautomation can help companies accurately track financials throughout the entiresales and service delivery cycle.

SaaS bookings, billings and revenue example

Here’s an example, based on a fictitious SaaS company, that illustrates the potentialdifferences among bookings, billings and revenue. To keep it simple, we’ll imaginethat eachcustomer commits to a one-year subscription contract with a $12,000 total contract value,but two clients pay the full amount in advance while two others pay monthly.

The bookings each month are the total value of all contracts signed that month, regardless ofhow the customers pay for their subscriptions:

Billings are the total amount billed each month. For customers paying a year’ssubscriptionin advance, that equals the full $12,000 value of the annual contract; for others,it’s a$1,000 monthly charge:

At the end of each month, the company records the revenue it has earned from deliveringsubscription services during the month. For customers that paid a year’s subscriptioninadvance, the revenue is calculated as one-twelfth of the annual payment. For customers thathave opted to be billed monthly, the revenue matches the amount billed.

As this example shows, bookings, billings and revenue can present very different views of thecompany’s financial performance. The SaaS company’s bookings highlight thecompany’s fieldsales momentum and potential future revenue. Billings show the incoming cash flows that thecompany expects each month. Revenue trails the other two metrics, yet its growthdemonstrates the steady expansion of the business, based on how much the company actuallyearns each month.

SaaS Accounting Made Easy With NetSuite

NetSuite’s cloud-based enterprise resourceplanning(ERP) suite provides comprehensive accountingsoftware that allows SaaS companies to manage their financials with increasedefficiency and speed. NetSuite automates and streamlines accounting tasks, helping companieseliminate time-consuming, error-prone manual steps, while accelerating key financial closeprocesses. NetSuite automatesrevenue recognition, enabling SaaS companies to track complex revenue models, ensureaccurate financial reporting and comply with accounting standards, including ASC 606 andIFRS 15. Companies have real-time visibility into financial data that helps them makeinformed decisions and react quickly to fast-changing market conditions. SaaS providers canmonitor a broad range of standard financial metrics and create custom metrics that matchtheir business needs, ensuring that they can accurately track bookings and billings, as wellas revenue. Forecast plans are created automatically for each contract so that companies canimprove their forecast accuracy and update projections as revenue is recognized.

Billings, bookings and revenue are all important metrics that provide insights into acompany’s financial performance. Analyzing these metrics individually and incombinationhelps businesses gain a better understanding of both their growth potential and theircurrent performance. This helps SaaS providers and other companies make considered,well-informed decisions that drive future growth and profitability.

Bookings, Billings and Revenue FAQs

What does bookings mean in finance?

Bookings are the value of contracts won by a company. They represent future revenue, sothey’re a good indicator of the company’s potential for growth. For any period,the totalvalue of bookings can include contracts of different types and spanning different timeframes. The revenue from those bookings is often generated over a long period.

What are bookings vs. revenue?

Bookings and revenue are both important financial metrics. They reflect different stages inthe process of selling and delivering products and services. Bookings are the value ofcontracts signed within a specific period. Companies generate revenue over time as theydeliver the services and products specified in those contracts. They recognize revenue asthey earn it, meaning, after they have delivered on their obligations to customers.

What is the difference between backlog and bookings?

The terms bookings and backlog have some similarities but differ in meaning. Bookings referto the value of the deals agreed upon by a company and its customers. Typically, bookingsrepresent work that the company will undertake in the future, so it’s a measure offutureincome. Similarly, a company’s backlog represents orders it has received but has notyetexecuted. However, the term implies that the company is not able to immediately start workon those orders because of some constraint, such as a lack of skilled staff or rawmaterials.

How do you convert bookings to revenue?

Companies convert bookings into revenue when they fulfill the obligations to customers asspelled out in sales contracts. For example, a company’s bookings might include a dealtosupply five different products over time, each priced individually. After delivery of eachproduct, the company recognizes the revenue that was allocated to that product in thecontract.