What are Bookings vs. Billings?
Bookings are a SaaS metric that represents the value of a customer contract with a contractual spending commitment, most often structured as an annual or multi-year agreement.
How to Calculate Bookings (Step-by-Step)
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: SaaS Business Model (Multi-Year Contracts)
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.
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.
Bookings vs. Billings vs. Revenue (GAAP)
It is essential for operators and institutional investors such as venture capital (VC) and growth equity (GE) firms to understand the difference between bookings and billings 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.
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”.
Compared to GAAP revenue, bookings are a more accurate indicator of a company’s growth profile and the effectiveness of its sales and marketing (S&M) strategy.