Clarifying SaaS Bookings, Billings, and Revenue

Learn how dollars flow through SaaS companies: from sales closing a deal, cash hitting the bank, and revenue being recognized.

What are SaaS bookings?

When a customer commits to spending money with your company

What are SaaS billings?

When your send a bill and expect to collect cash soon

What is SaaS Revenue?

The portion of services that match a given accounting period

A software-as-a-service (SaaS) company has the same three financial statements as other companies: the income statement, balance sheet, and cash flow statement.

However, these financial statements provide an incomplete picture for a SaaS company because there are large gaps between revenue that can be recognized under GAAP and the timing of cash received from customers.

Whether you’re a SaaS founder, investor, advisor, or board member, it’s important to understand the nuances of SaaS revenue. And how to select the right revenue metric to track.

In this post, we will discuss the flow of dollars through a SaaS company: from your sales team closing a deal, the cash hitting your bank, and the revenue being recognized. We’ll end with a discussion on our favorite forward-looking metric.

Have questions? Contact Alluxo today for a free consultation to discuss SaaS bookings, billings, and revenue.

Defining Your Sales Pipeline

Let’s start with the sales pipeline for a fictitious SaaS inventory management company.

This particular pipeline has the following four stages:

  1. Leads: Shown interest in your industry, engaged with your marketing campaigns
  2. Prospects: Shown interest in your product, engaged with your sales team
  3. Proposal: Sent a written proposal with price, feature list, and start date
  4. Closed Deal: Signed proposal and becomes a customer

Your head of sales approaches you and says that Acme Inc., a new customer, finally signed an annual contract for $24,000 that will be paid quarterly. The deal was signed in January 2020 and the contract term is January 1, 2020 to December 31, 2020.

The question is… what is the right way to record your SaaS bookings, billings, and revenue?

SaaS Bookings vs. Billings vs. Revenue

SaaS bookings are your commitments from customers. Once they sign the contract, you should consider the total contract value as new bookings (e.g., $24,000).

SaaS billings are your invoices to customers. In this example, you will send four invoices of $6,000. The first quarterly bill of $6,000 is your billings for January.

SaaS revenue is the portion of your service that was provided in a given period. For this annual contract, you can only recognize 1/12th of the total contract value – $2,000 – in January.

The difference between SaaS bookings, billings, and revenue for the same contract. The sum of revenue ($24k) and the sum of billings ($24k) always equals the total bookings number.
The difference between SaaS bookings, billings, and revenue for the same contract. The sum of revenue, the sum of billings, and bookings ($24k) are always equal.

Note that after twelve months, the sum of billings is $24,000 ($6,000 x 4) and the sum of revenue is also $24,000 ($2,000 x 12). Thus, you can think of bookings as a leading indicator of future billings to be generated and future revenue to be recognized.

In a brick and mortar business, these events happen at once. For example, you walk into a store, pay $50 for your items, and then leave with a receipt that same day.

With software, it’s likely that you sign a contract today, bill quarterly or semi-annually, receive cash when the check arrives in the mail, and recognize revenue equally over the contract term.

Annual Recurring Revenue (ARR)

We couldn’t talk about SaaS revenue without talking about ARR, could we?

ARR is a measure that standardizes all of your recurring software revenue to a one-year timeframe. And it’s one of the most famous of all SaaS metrics.

From conversations at Startup Grind Global Conference to press releases, you see companies tout their ARR numbers. But I’m here to show you the problem with ARR by adding ARR to the same graphic that we showed above.

The difference between SaaS bookings, billings, revenue, and ARR for the same contract. Notice how ARR is the same in every period.
The difference between SaaS bookings, billings, revenue, and ARR for the same contract. Notice how ARR is the same in every period.

All active contracts count towards ARR. And, as you can see, ARR in this case is $24,000 for the entire year – even though no new customers have been signed.

This is the problem: ARR does not clearly describe your recent performance.

Notice how in February, bookings were at $0 but ARR was still at $24,000. This is the same business but these two metrics paint two very different pictures. February ARR makes the company look like it's doing fine, while February bookings show that no new deals were closed.

Bookings as Your North Star

Scaling a SaaS company is difficult enough as is. And that’s why we wanted to spend the time to talk about SaaS bookings, billings, revenue, and yes, even ARR.

We believe that new bookings should be the metric that SaaS operators use to evaluate their performance. Your bookings number is a much better indication of recent performance. Put another way, you cannot hide behind your bookings.

If you have a great month and bookings are through the roof, that’s great! But know that you will start next month with $0 in bookings.

I’ll leave you with the words of Villi Iltchev: “When I worked at Salesforce, Marc Benioff understood that the only metric that mattered to describe growth was bookings. ARR was not a number that was ever discussed with employees. Most employees did not even know the ARR of the company. But, everyone knew the bookings goal for the year.”

Conclusion

There are plenty of ways to segment a SaaS company’s revenue and growth, including:

  • SaaS bookings: When a customer commits to spending money
  • SaaS billings: When your send a bill and expect to collect cash soon
  • SaaS revenue: The portion of services that match a given accounting period
  • Annual recurring revenue: An annualized number for all of your recurring revenue that has different billing cycles

Remember that first have bookings (when the contract is signed), then you have billings (when you send invoices). It’s also important to also note that revenue must be matched to the services being offered.

ARR is a good measure, but we think it’s even better to measure your team’s ability to drive bookings by signing new customers and growing your existing accounts.

Make this year that you track and improve your new bookings.

Have questions? Contact Alluxo today for a free consultation to discuss SaaS bookings, billings, and revenue.

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