As a B2B SaaS business owner, you should be aware of the difference between bookings, billings, and revenue. In this write-up, we have furnished these details for your convenience.
Bookings, Billings, and Revenue are linked to each other. But you should know that these should not be used interchangeably. The differences between them are so lean that even experienced executives can get confused. As a B2B SaaS business owner, you should be aware of the differences between these terms and understand them very clearly. If you are not sure about the differences and significance of these terms, keep on reading. In this write-up, we have furnished these details for your convenience.
To understand the differences between bookings, billings, and revenue, the three interchangeably used words; it is important to understand the three terms separately. So, before we talk about the differences between them, let us first understand these terms separately.
Booking in the SaaS business refers to when a customer ‘books’ your SaaS product or service. This means the situation when a customer commits to spend money on your product or service. Suppose a customer signs up for a paid plan offered by your company; this event will be considered booking for your company.
For better understanding, booking can be divided into three categories –
SaaS businesses need to analyze their booking status to keep an eye on their performance in converting their leads into paid customers. Analysis of booking helps to understand the direction of the company’s revenue growth and financial health. Here it is important to note that the number of unique bookings is as important as the values of the bookings. A higher booking ratio and greater booking value signifies that you are successfully delivering your message to your prospective customers.
Analysis of booking is a good thing, but it does not show the complete picture of a company’s performance. Multi-year contracts done by a customer is a good thing for a business, but the value of the contract cannot be included as revenue because salaries or any liability of a company cannot be paid out of future commitments.
Billing is the next stage after booking in a SaaS business. Billing is the event of collecting money from your customers who have booked your product or service. The cash flow of a business depends on its billing.
Businesses that bill their customers upfront, i.e., have better-managed cash flow at the time of booking. In such cases, the booking and billing amounts are the same.
It is important to match your booking and billing status and analyze them to understand the position of your business. If your billing status does not match your booking status, it may convey that your business might run into cash flow issues.
It is worth noting here that Billing does not directly translate into revenue because revenue cannot be recognized unless a product or service is delivered to the customer. The billed amount remains a liability in the balance sheet unless the product or service is delivered.
Revenue can be seen as the third stage after booking and billing. It is the stage where the company recognizes the billed amount as their revenue and delivers the customers with the product or service they have paid for. The actual amount that the business ‘earns’ as the GAAP standards allow revenues to be recognized only when earned.
As SaaS products are subscription-based, revenue for the company is recognized over the lifetime of the subscription and not only at the beginning.
Revenue shows the actual position of a business’s performance because it is the real amount received by the company. If a SaaS business relies on the booking or billing stage data, it may see inflated numbers that may not be the true reflection of the business’s performance.
Bookings, billings, and revenue are three metrics that can be used to measure a SaaS business’s health. Now that we have discussed the basics of the three concepts separately, we can proceed toward the differences between these terms to give you a clearer picture.
Booking, as we discussed, is a forward-looking metric. It is the first stage where the customer books for a product or service. Then comes the stage of billing, where the money is actually received from the customer, and finally, the stage of revenue, where the product or service is delivered to the customer. So, we can see the booking, billing, and revenue as the three stages.
Bookings do not have a direct impact on financial reports or income statements. In fact, the GAAP standard does not recognize the term booking. But businesses use it to get a view of their business performance. The cash flow statement, balance sheet, and income statement are impacted at the stage of billings. Revenue recognition impacts on the balance sheet and income statement, too, as it is the stage where income is realized for the business.
While booking, billing, and revenue are terms related to finance and are used in every business, SaaS businesses need to utilize them differently. A SaaS business should not use these as mere financial reporting tools, just like other businesses. Analysis of figures related to booking, billing, and revenue can help SaaS businesses extract much information about their business that can be used for making important decisions. It should be noted that these important decisions do not only include financial decisions but also decisions related to other areas of business operation.
So, if you have to use these as tools for decision–making, you need to understand the differences between them. Suppose you have an excellent rate of booking, but it significantly declines at the billing stage. This scenario signifies that your marketing team is successfully sending out your business message and attracting customers who are willing to pay for your product. But, you are failing to hold customers and take the money they are willing to pay. This information can be really helpful in searching for the gap in performance and better your revenue-generating capacity. But, if you do not know the difference between these terms, you will not be able to do their comparative analysis.
When you closely analyze these metrics you have vital information like revenue booked by your company, periodical (monthly, quarterly, half-yearly, or annually) revenue, billed revenue, etc. This information helps you make many important decisions. These will help you plan payments of commissions and variable compensation (where applied) to your sales representatives. In the absence of the data and understanding of these terms taking the right decision on such matters would become really difficult.
Despite being used interchangeably by many, bookings, billings, and revenue are different terminologies. SaaS businesses can use these terms relating to financial reporting as a tool for decision-making. So, it is important for SaaS business owners and executives to understand their differences.23
If you understood the differences between these terms, you should start using them separately and in combination to understand your business performance better and to make important decisions to improve them.
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