Bookings vs. Billings

How to Calculate Bookings?

Bookings, under the context of the software-as-a-service (SaaS) industry, records the value of a contract on the date on which the agreement was formalized.

Long-term customer contracts that span multiple years and where the end customer is a business (i.e. B2B) are prevalent in the SaaS industry.

The bookings metric is a critical metric for SaaS companies and is perceived to be a more informative measure of “top line” growth than the revenue recognized under accrual accounting.

Conceptually, bookings can be thought of as the top of the “waterfall” in a revenue build, as bookings over time eventually become revenue earned (and recognized) on a company’s financials.

Early-stage SaaS startups and even market-leading public companies tend to pay close attention to their bookings and billings data — all non-GAAP metrics — when assessing historical performance and projecting future performance.

The bookings metric for SaaS companies ensures that contractually committed revenue is counted on the date of the agreement between the company and the customer, irrespective of the fact that the customer has neither issued any payment nor has the company collected any cash payment.

Bookings vs. Revenue: What is the Difference?

Unlike revenue recorded per accrual accounting guidelines, bookings is a forward-looking metric that does not understate the actual value of customer contracts.

Given the recurring revenue model and multi-year customer contracts prevalent under the SaaS business model, accrual-based revenue recognition can often be misleading in portraying the true growth profile and future trajectory of SaaS companies.

Compared to GAAP revenue, bookings are a more accurate indicator of a SaaS company’s growth profile and the effectiveness of its sales and marketing (S&M) strategy.

For companies that utilize multi-year service agreements with customers – which can range from 6 months to annual and multi-year arrangements – the customer will book contracts where the company is obligated to deliver a product and/or service across a specified period. Under GAAP, revenue is not recognized on the date when the deal was signed, or even when the customer is billed for annual (or longer) contracts.

Instead, the revenue is considered to be “earned” only if the company delivers the promised product or service to the customer.

The revenue reported under GAAP accounting is NOT equal to the bookings of a company with long-term service contracts.

In fact, one of the limitations of accrual accounting is that GAAP revenue can be misleading in terms of understanding a company’s past revenue growth and forward-looking trajectory, i.e. the sales “momentum”.

Bookings Formula

A SaaS company’s total bookings represent the sum of all of the company’s existing contracts with its customers.

The annual contract value (ACV) is subsequently calculated by taking a company’s TCV bookings and dividing the metric by the term of the contract (i.e. the number of years).

If a company’s billing cycle is on a monthly basis, it is necessary to use ACV as opposed to TCV to determine the amount billed per month.

SaaS Business Model: Bookings vs. Billings vs. Revenue (GAAP)

Operators and institutional investors, such as venture capital (VC) and growth equity (GE) firms, must understand the differences between bookings, billings, and revenue in the SaaS industry.

• Bookings → Bookings are defined as the value of a contract signed with a prospective customer for a given period.
• Billing → On the other hand, billings represent the value of the invoices sent to customers to receive their owed payments, i.e. the invoices billed to customers (and now the company actually expects to collect cash from these billed customers).

While bookings are a non-GAAP metric, it is still a key performance indicator (KPI) for B2B software providers, namely in the enterprise software industry, because bookings are a key input used to extrapolate the annual recurring revenue (ARR) for companies with contractual revenue.

Bookings vs. Billings Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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1. B2B SaaS Operating Assumptions

Suppose a B2B SaaS company secured two multi-year contracts with two customers, which we’ll refer to as “Customer A” and “Customer B”.

The structure of Customer A and Customer B’s contracts is as follows.

2. SaaS Bookings Calculation Example

The starting date of Customer A’s contract is right at the beginning of the New Year on 1/01/2022, while Customer B’s contract begins the month after.

• Bookings, Customer A → In January 2022, the entire $24 million contract with Customer A is recorded as a booking by the SaaS company.
• Bookings, Customer B → As for Customer B, the $6 million contract is recognized in the month of February per the stated assumptions.

From these two customers, the total booking value equals $30 million.

• Total Bookings = $24 million + $6 million

3. SaaS Billings Calculation Example

In order to make the concept of bookings more intuitive, we’ll now calculate the company’s billing and GAAP revenue.

Customer A is billed on an annual basis, i.e. every twelve months, so it’ll receive one invoice from the company in January for the entire year of 2022 (and the $6 million in ACV is recorded at that point).

Unlike Customer A, Customer B is billed on a monthly basis, so the TCV must be divided by twelve months to convert the figure into monthly amounts.

• Monthly Billing, Customer B = $6 million ÷ 12 Months = $250,000

Each month that the contract is active — starting in February 2022 — $250,000 is billed to Customer B by the company.

3. SaaS Bookings vs. Revenue vs. Billings Analysis

In the final part of our exercise, we’ll calculate the revenue recorded under GAAP.

For Customer A, the $6 million was received upfront, however, the revenue is only “earned” (and recognized) one month at a time.

Therefore, the $6 million billing is divided by 12 months, resulting in $500,000 in revenue being recognized each month over the term of the contract.

• Monthly Revenue Recognition, Customer A = $6 million ÷ 12 Twelve Months = $500,000

Note that the ACV, rather than the TCV, is used here.

For Customer B, the GAAP revenue is straightforward because the billings are already recorded in the period the revenue is earned, so $250,000 is recorded each month starting in February.

We can now compute the total bookings, billings, and revenue for the fiscal year ending 2022.

• Total Bookings = $30 million
• Total Billings = $8.75 million
• Total GAAP Revenue = $8.75 million

Why are Bookings Important in the SaaS Industry?

While the current financial state and recent billing performance is critical to SaaS companies, the B2B software industry tends to be held to a very high standard.

The revenue generated by B2B software companies is most often on a contractual basis, meaning there is a guaranteed number of years the company will continue doing business with its customer base, i.e. close to “guaranteed” recurring revenue.

However, the multi-year contract structure in the B2B SaaS business model can conceal internal problems (and the gradual accumulation of issues from customers, employees and more).

A real-life example of this sort of trait can be seen in IBM Watson in the A.I. healthcare vertical, where despite the constant negative feedback and press coverage on the software (and its plethora of issues), the division still was able to continue operating until IBM finally decided to shut it down in 2021 in an effort to improve its margin profile.

With that said, struggling B2B software companies usually “bleed out” in a slow, gradual process, rather than an abrupt collapse in a single year, albeit there certainly are exceptions.

Hence, many private equity firms view B2B companies favorably, but in the case of venture capital, most firms would become weary and take a close look at the customer churn (and might pass on a potential investment opportunity even if the revenue upside was significant).

Of course, there are worst-case scenario exceptions wherein B2B software companies end up becoming insolvent and filing for bankruptcy protection in a matter of a couple of years, but this is usually due to an acceptance and recognition by management that the start-up would most likely fail and that it would be in the “best interests” of their investors and customers to throw in the towel.

In those types of scenarios, the SaaS company most likely could have continued operating for a few more years if the management team wanted to, but the longer-term prospects of the business were bleak, resulting in the return on capital for the sake of their investors.

Bookings vs. Deferred Revenue: What is the Difference?

One common mistake is using the terms “bookings” and “deferred revenue” interchangeably.

In accordance with the revenue recognition policies set under accrual accounting, revenue is recognized once the product or service is delivered to the customer (and thus, “earned”).

The issues here emerge from how SaaS companies charge customers, i.e. the SaaS business model for B2C companies involves multi-year contracts and upfront payments from customers for products or services not yet delivered.

Why? The revenue associated with upfront payments cannot be recognized on the income statement until the said product or service is actually delivered.

The distinction between bookings and deferred revenue is that in the former, the customer has not paid for the product yet, nor has the customer received the product.

In contrast, in the case of deferred revenue, the payment from the customer was already received in advance, and the company is the party with the unfulfilled obligation.

Until the obligation on the company’s end is met, the value of the upfront payments remains recorded as deferred revenue (i.e. “unearned” revenue) on the liabilities section of the balance sheet.