This post was originally published here.

The difference between bookings vs billings vs revenue in a SaaS business can confuse even experienced executives. Though the three are linked, make sure you understand what each of them can tell you about the state of your business. Check out our free Excel template to follow along!

The definition of bookings in SaaS

Bookings is a forward-looking metric that refers to the value of contracts signed with customers.

In a nutshell, bookings represent your customers’ commitment to pay your business for your services.

As an example, let’s say one of your customers purchases a 3-year plan at $10,000 per year that bills annually. Your bookings on the contract are $30,000.

It’s awesome to close a multi-year contract, but you can’t pay salaries out of future commitments, and you can’t record it as revenue until you provide your service. So bookings are great—but only tell a part of the story.

You can split bookings into:

• New bookings—new customers who have just signed for a product or service
• Renewal bookings—existing customers who are renewing (or have renewed)
• Upsell bookings—customers who have decided to expand their contract

Looking at bookings will help you understand the trajectory of your business’ revenue growth and financial health, and how well your sales team and product offerings are performing. Bookings is also the most forward-looking indicator of the three we’re discussing in this post.

The definition of billings in SaaS

Billings are what you invoice your customers. In the case of the example 3-year contract above, your billings are the annual amount you invoiced the customer—$10,000 each year. If instead the customer prepaid the contract for the whole term in advance, the billing and booking amounts would be the same. In our bookings, billings, revenue template you can make change the billing options to see the effect.

Billings are the closest to cash and cash flow of the three metrics. Of course, you can’t pay salaries with customer invoices either—it’s important to make sure you’re collecting your accounts receivables expeditiously. Ideally, your billings will be close to cash, with cash lagging behind depending on your payment terms and collections effectiveness.

But your billings don’t translate directly into revenue, because you can only recognize revenue once you have delivered your service. If you bill $12,000 for the year and the customer pays you promptly, you’ll have the cash in your account, but you can only recognize a portion of it as revenue. You’ll put the rest in a deferred revenue account, a liability on the balance sheet, until you deliver the service. Companies that close a lot of yearly billing deals tend to have high deferred revenue.

The definition of revenue in SaaS

Revenue refers to the money a business earns after it provides its services or products to the customer. According to GAAP standards, revenue can only be recognized once it is ‘earned’.

Because there are strict rules about revenue accounting, revenue is the “gold standard” metric. Investors will put the most weight on it as your business matures.

For example, giving customers aggressive discounts to sign multi-year contracts can inflate bookings. And giving discounts to customers who pre-pay can inflate billings. An otherwise so-so business could temporarily create the appearance of higher growth. But aggressive discounting will ultimately come at the expense of deferred and recognized revenue. Savvy investors will look to balance all three metrics to have a fuller picture of the health of the top-line growth of the business. 

Conclusion

One of the key things to consider when understanding a company’s bookings, revenue, and billings is the subscription model or cadence of the business. To understand your financial health and growth prospects, consider how often your company provides services, and how often customers pay for them. 

The most successful SaaS businesses look forward. They forecast revenue based on accurate pipeline data and continuously track the relationship between bookings, billings, and revenue.

This includes ratios such as:

• Pipeline to bookings
• Bookings to revenue
• Revenue to cash

Of course, great SaaS businesses also take historical data into consideration and ask questions such as:“Based on these ratios and numbers, what does our pipeline need to be for us to hit our revenue and cash projections in the future?”

Make sure your business has predictable cash flows and is built for growth: take care to understand the difference between bookings, billings, and revenue.