Even senior executives sometimes struggle to understand the distinction between bookings and revenue in a SaaS organization. Although the two are connected, it's crucial that when running a sales operation, you are well aware of what each of them might reveal about the status of your company.
Bookings occur when a client decides to purchase a product and is willing to proceed to take measures to secure the product. It's about a customer entering a binding agreement to purchase your goods or services. Conversely, revenue is when the accounting wizards can justify recognized sales. Let's further discuss these business entities in detail.
What does booking entail in the sales world?
Bookings show a customer's commitment to spend money and the organization's commitment to collect money over time in exchange for the services rendered. Most of the time, the commitment is associated with a contract at the signup or subscription, which may be executed in writing or electronically in the case of entirely self-service platforms. To simplify, consider a reservation as the customer's signature on a contract; he may not have signed it on paper but rather by pledging to utilize your service or enrolling online.
Booking tracking is crucial since it shows how well sales are generally doing and how the company is expanding. The value of customer subscriptions or contracts signed for a specific period with a customer is how bookings are typically described because there is no standard definition for it in GAAP (Generally Accepted Accounting Principles).
Booking has a good effect on all kinds of businesses
All subscription businesses need to track bookings. Such organizations may reasonably estimate prospective income from bookings and see how the market responds to their offerings. Bookings also assist marketers in enhancing their customer acquisition approach and understanding what is effective.
What are the types of bookings available?
The three most frequent reservations used by SaaS business organizations are new reservations, upgrades/expansion reservations, and renewal reservations.
New contracts, renewals, and planned upgrades and downgrades are common variables that most organizations take into consideration. But several additional categories are widely used by organizations to estimate value in advance.
This features existing customers who have subscribed to new services and new subscriptions or customers.
This consists of ongoing contracts that are up for renewal and determined when a renewal request is submitted or when the renewal date arrives.
This incorporates extra reservations obtained through the upselling of expansion services or upgrades.
For instance, a subscriber who wants to upgrade from the Pro ($500) plan to the Enterprise Plan ($2,000) must sign a new contract at $24,000 a year, referred to as an upgraded booking.
In the case of multi-year contracts, where bookings with a minimum of one year's committed revenue are considered, Annual Contract Value bookings are relevant. Total Contract Value Bookings, on the other hand, considers the entire contract length.
Some companies consider non-recurring bookings like training costs, set up/installation fees, and discounts, even if most subscriptions are recurring and comprise defined services. Just like we've recurring revenues, we also have recurring bookings.
What does revenue entail in the sales world?
A business's revenue is the inflow of assets and/or the settlement of obligations produced by its primary operations. In the case of the SaaS business, providing cloud-based services per the agreement and the SLA constitutes the primary activity.
In contrast to bookings, which represent the total amount of contracts signed (during a predetermined period), revenue denotes a reasonable assurance that the contracts will be fulfilled.
When the service is rendered, revenue is generated. A subscription contract, such as one for software-as-a-service products, recognizes how much revenue is generated throughout the subscription.
Therefore, if you're handling things on a monthly basis, you'll recognize each month as revenue. The concept of recognizing revenue is essential in several organizations.
Revenue effect on businesses over time
As businesses offer services over time, service providers often recognize a percentage of the contract value each month, quarter, or year. As more payments are received over time, deferred revenue decreases. If there are contracts that span several years, a high deferred revenue may turn into a long-term obligation.
Your recognized revenue would be the total of the monthly revenues each of your customers contributes, considering our sample data set. Keep in mind that neither churn nor contraction is a factor we are considering.
Recognizing the distinction between bookings and revenue
After going over the fundamentals of each idea (bookings & revenue) separately, we can move on to the distinctions between them to help you understand.
Business lifecycle stages
Booking is a forward-looking metric, as we have mentioned. It is the initial stage of ordering a good or service from the customer. After that, the customer's payment is received during the billing deals stage, and the goods or service is finally provided to the consumer during the revenue stage. Therefore, the three stages are booking, billing, and revenue.
Financial reports are affected
Reservations do not directly impact financial statements. In actuality, the term "booking" is not recognized by GAAP. However, businesses utilize it to gauge their performance.
At the time of customers' upfront billings, the cash flow statement, balance sheet, and income statement are all affected. Since revenue recognition is the point at which a company realizes income, it also has an impact on the balance sheet and income statement. Cash flow problems will most likely arise at this stage.
Why SaaS business owners need to understand the differences between these sales terms
Although every firm uses the financial phrases booking, billing, and revenue, SaaS businesses must use them differently. Like other organizations, a SaaS company shouldn't merely employ these as financial report revenue tools.
Analysis of SaaS monthly bookings, invoicing, and SaaS revenue data can provide SaaS organizations with a wealth of knowledge about their operations that can be used to make key business performance decisions. It should be highlighted that these crucial choices concern not only financial matters but also choices on other corporate operations.
Therefore, you must be aware of their distinctions using these as decision-making tools. Let's say your booking rate is outstanding, but it sharply drops when it comes to organizations having to bill monthly billings.
This shows that your marketing staff effectively spreads your brand message and lures clients who are prepared to buy your product. However, you are failing to keep clients and accept the cash they are prepared to spend.
Finding performance gaps and enhancing your ability to generate income can be done using this information. However, you cannot compare these terms if you do not understand the differences between them.
Despite frequently being used synonymously, bookings, billings, revenue, and income are distinct concepts. Bookings are not the same as revenue; you can only recognize revenue once you have delivered your product/service. SaaS companies can use these financial reporting phrases as a decision-making tool. Therefore, it's critical for executives and business owners in the SaaS industry to comprehend these distinctions.
If you can distinguish between these phrases, you should use them alone and in combination to better understand your company's performance and make crucial decisions to enhance it.
Frequently Asked Questions (FAQs)
Should bookings be higher than revenue?
Not every reservation results in a sale in some sectors. Bookings that are less than revenues may be a bad sign. Bookings that are significantly higher than revenues may indicate future success. However, it can also suggest that your business is experiencing trouble realizing revenue.
Why are bookings higher than revenue?
When a consumer agrees to do business with your organization or when all the closed deals are "booked," that is when sales booking occurs. When salespeople are paid once a deal is closed, it inspires them immediately and gives them great feedback, which motivates them to put up more effort and make sales.
What is revenue?
For a good reason, the revenue statistic is the first to appear on an income statement. It serves as the basis for determining profit, and if you can produce enough of it, your company will be able to pay its bills and survive over the long term.
Why is it important to know the difference
Sales and project management are entirely distinct professions. They call for various aptitudes and skills. Making salespeople accountable for revenue recognition would impede your sales engine by diverting their attention. Stop involving your salespeople in project management.
Pay them when they make the reservation, and then assign a project manager to complete the work. This helps your project management team stay focused on delivering for the customer while keeping your sales team and sales reps concentrated on the next deal.
Are bookings the same as sales?
When a sale occurs, it is quickly recognized. On the other hand, bookings are only acknowledged when the service or product has been delivered. This often happens after the contract is signed, sometimes even years later.