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What are Bookings Vs. Revenue?
Bookings and revenue are commonly used to measure a company’s financial performance and make important strategic decisions. While both are related to a company’s income, they represent different concepts and have distinct purposes in the revenue cycle.
Bookings refer to the venue of signed contracts. They measure customer demand for a company’s products or services.
Revenue represents the actual cash a company receives from its customers after deducting any discounts, returns, and allowances. It indicates the actual sales or services a company provides.
There are a few key differences between bookings and revenue:
- Timing. Bookings are recorded when a contract is signed, regardless of when the actual income will be received. Revenue is recognized only when the payment is earned (i.e., the service has been rendered or the product has been delivered).
- Components. Bookings consist of potential sales or orders that have been contracted but not yet fulfilled. Revenue only includes completed transactions.
- Accuracy. Since bookings are based on signed contracts, they can sometimes overstate a company’s financial performance if they are not fulfilled (e.g., due to churn). Revenue provides a more accurate picture of a company’s actual income.
- Forward-looking vs. historical. Bookings reflect potential future revenue and can be used to forecast sales and revenue in the upcoming periods. Revenue is based on past sales and provides a historical view of a company’s financial performance.
- Strategic vs. tactical. Bookings are used more for strategic decision-making, such as investment planning. Revenue is used for tactical decisions, like determining pricing strategies or evaluating product performance.
TL;DR: Bookings are the first step in the revenue cycle because they show the total value of future additional revenue. Revenue is the last step because it denotes the actual income a company has received and earned from customers. To fully understand a company’s current and future potential financial health, it’s important to understand how they work together.
- Bookings in SaaS
- Bookings in the revenue cycle
What’s the Difference Between Bookings, Billings, and Revenue in the Revenue Cycle?
Definition of Bookings
Bookings measure the value and volume of new contracts or orders that customers have signed but the business hasn’t yet fulfilled. For SaaS companies, bookings represent the total value of new customer subscriptions or renewal contracts signed during a specific period. They also include ancillary services, such as training, implementation, and support, if they’re part of the contract.
Since bookings represent future revenue, they’re a key metric for forecasting and budgeting purposes. Companies often track bookings closely to understand their current sales pipeline and predict future revenue.
The drawback to relying on only bookings to forecast revenue growth is that there is no guarantee that all the contracts will be completed or that customers will make all the payments.
Definition of Billings
Billings are the money a business invoices or charges its customers during an accounting period. It’s generally seen as a good indicator of current cash flow because it’s the income a company expects to see in the near future.
In SaaS, billings include all of a company’s accounts receivables, including recurring subscription payments, support and consulting costs, and one-time fees. Billings can differ from bookings if customers pay upfront for a subscription contract that will last several periods.
In the bookings stage, the balance sheet and income statement are not affected. The billings phase is when an organization can record the accounts receivable in its balance sheet as an asset.
Definition of Recognized Revenue
Recognized revenue is billings that a company has booked as revenue in its accounting records. It’s the actual amount of money a business earns from its customer contracts.
While bookings represent future contracts and billings represent current income, recognized revenue reflects the past. Under ASC 606, it’s only recorded after a company has fulfilled its contractual obligations and received payment. So, bookings may be a considerably larger figure, while recognized revenue will increase gradually over time.
Types of Bookings
There are three main bookings categories. A few others are typical for SaaS companies, which often sell multi-year contracts.
- New bookings are customers who have signed up for the product/service for the first time. This includes customers who are new to the company and those who have already used different products but have signed an agreement for a completely new one.
- Renewal bookings include current customers who are due for contract renewal. Companies either record them on the date they’re scheduled for renewal or when they receive the renewal request, whichever comes first.
- Upgrade bookings eventually turn into expansion revenue. They’re first recorded as bookings when a customer grows their current contract’s value by buying more licenses, investing in additional products, or adding additional paid users to their account.
- Annual contract value (ACV) bookings are a particular type of bookings SaaS companies use when they require a one-year commitment upfront for a multi-year contract.
- Total contract value (TCV) bookings are similar to ACV bookings, but account for the total value of a long-term contract. They’re used when the customer commits to the full contract duration, whether they will pay all the money upfront or not.
- Non-recurring bookings are the one-time fees associated with the first steps of contract execution. They include implementation, setup, infrastructure, and professional services costs.
Importance of Measuring Bookings in SaaS
The times of payment and revenue growth don’t always align with a company’s initiatives and business goals. Bookings tell them how much they can expect in the future, which is helpful for planning for future investments like increasing headcount or developing a new product. It’s also helpful for evaluating sales/marketing performance and r.
Evaluate Prospect to Bookings Ratio
Prospect-to-bookings is a financial metric that shows the ratio of new prospect meetings to closed bookings, showing how many prospects become customers. It’s a fairly accurate measure of sales performance because it shows how well the sales team nurtures leads, moves them through the pipeline, and eventually converts them into paying customers.
A high prospect-to-bookings ratio means a company has an efficient sales force and is doing well in converting leads into customers. A low ratio could indicate issues with the product, sales strategy, or competition.
Determine the Best Pricing Model
By closely monitoring and analyzing bookings data, companies can gain valuable insights into their customers’ purchasing behaviors and trends. For instance, the size and frequency of bookings can reveal customer preferences for specific pricing structures, such as monthly subscriptions versus annual contracts. Companies can also observe the effect of price changes on bookings, providing an experimental basis for fine-tuning their pricing strategy.
Bookings insights can also uncover any correlations between pricing, sales performance, and customer acquisition costs. So, when interpreted correctly, it can guide businesses in setting competitive, sustainable, and profit-maximizing prices that resonate with their target market.
Uncover Issues with Contracts
If a company consistently sees low-value bookings or a decline in the average contract value over time, this could signal issues with their contract structure or sales process. The same is true for low numbers of upgrade/renewal bookings or high numbers of churned customers, which indicate low satisfaction levels within the customer base.
A low rate of renewals or upgrades could also point to issues with customer retention or upselling tactics. The bookings data, thus, serves as an early warning system, allowing the company to identify and rectify contractual issues before they escalate, ensuring the longevity and success of customer relationships.
Spot Roadblocks in the Revenue Cycle
Given that bookings lead to revenue, monitoring bookings data can help identify any roadblocks in the revenue cycle. If a company sees a large number of new bookings but low recognized revenue, it might be an indication of billing or collections issues. Similarly, if there is a high volume of upgrades and renewals but low expansion revenue, this could signal issues with retention and expansion strategies.
They also act as a diagnostic tool for earlier stages in the revenue cycle, such as sales and marketing. By analyzing bookings numbers, companies can identify any issues in the prospect pipeline and make necessary adjustments to improve lead generation and conversion rates.
For example, low numbers of non-recurring bookings could reflect a reliance on one-time payments instead of recurring revenue, which is unsustainable for a SaaS company long-term. Or, sudden drops in bookings might signal issues with the lead generation process or problems with the sales team’s performance.
How to Calculate Bookings
Calculating bookings is simple. It’s simply the sum of all new orders or contract renewals a company receives in a specific period, which have been committed but haven’t yet been paid.
You can figure out the total bookings figure by adding up:
- The value of all new contracts signed during the period, whether they’re monthly or annual.
- The value of additional licenses sold to existing customers
- Customer commitments to expansion and renewal
- All professional services fees or other one-time charges new or existing customers have committed to pay.
Note that all of these figures must be based on customer commitments, not actual payments. For example, if a customer has committed to paying $50,000 over the next year, that’s considered $50,000 in bookings even if they only paid the first installment of $10,000 during the current period.
How to Convert Bookings to Revenue
Bookings become revenue when the company has fulfilled its obligations to the customer, and they have recognized it as such. For instance, SaaS companies can recognize revenue upon completing service delivery or based on a percentage of completion.
Here’s an example: Let’s say a SaaS company sells a $10,000 annual subscription to 100 customers on January 1st. The total bookings amount is $1,000,000 ($10,000 x 100 customers). However, the company only recognizes $83,333.33 in revenue for January (1/12th of $1,000,000), as that is the monthly portion of the subscription that was paid upfront.
Best Practices to Ensure Bookings Convert to Revenue
Companies need to move customers through the whole cycle to get to the revenue recognition stage (where the customer’s bill has been paid and earned). From bookings, several customers will churn or default. This is especially true with large, long-term contracts where revenue is recognized over time but bookings show the total contract value.
So, the primary goal of the company’s Customer Success team is maximizing the percentage that moves from bookings to revenue.
Companies need to move customers through the whole cycle to get to the revenue recognition stage (where the customer’s bill has been paid and earned)
- Ensure sales and customer success teams are aligned on pricing to set realistic expectations for customers.
- Regularly analyze bookings data to identify patterns and trends that affect revenue.
- Offer flexible payment options (monthly or annual) to meet different customer preferences.
- Establish clear contract terms and conditions to reduce potential disputes or delays in revenue recognition.
- Use CPQ software to automate and streamline the contract management process, reduce errors, and improving efficiency.
- Automate the collections process with subscription management and billing software to minimize defaults and involuntary churn.
- Monitor and improve customer satisfaction levels so Customer Success can prevent churn and promote upselling opportunities.
People Also Ask
Is bookings the same as deferred revenue?
The difference between bookings and deferred revenue is that bookings refer to the value of contracts that have been signed but not yet fulfilled or recognized as revenue. Deferred revenue, on the other hand, is revenue that has been received but not yet earned.
Sometimes, people confuse bookings for “unearned revenue.” The difference is that deferred revenue (which is also called “unearned revenue” in accounting terms) is the actual meaning of that term. Bookings are contracts awaiting payment (which would turn them into revenue), so it’s easy to see why that could seem like revenue that’s yet to be earned.
But, in accounting terms, unearned revenue is income the business has already received from customers. The business just hasn’t provided the service for or delivered goods. With bookings, there is no guarantee they will turn into revenue.
What is the difference between bookings and invoices?
Bookings act as a benchmark for future potential revenue, while invoices represent real payment transactions. Bookings are based on contract value and can include future payments, whereas invoices only reflect payments made at a specific time. However, invoices do add context to bookings by providing insight into how much customers are actually paying for their contracts.