As a SaaS founder, you’re likely focused on building a great product, acquiring customers, and scaling your business. However, understanding the financial aspects of your business is crucial for making informed decisions and attracting investors. Terms like bookings, billings, and revenue can be confusing, but they are essential for understanding your company’s financial health. Let’s break them down in simple terms.
Bookings: The Promise of Future Revenue
Bookings represent the total value of contracts signed with customers during a specific period. Think of bookings as the promise of future revenue. When a customer signs a contract to use your software for a year, the total value of that contract is considered a booking.
- Example: If you sign a contract worth $12,000 for a year of service, you have $12,000 in bookings.
Bookings are important because they indicate the demand for your product and the potential future revenue. However, they do not immediately impact your financial statements.
Billings: Invoicing Your Customers
Billings refer to the amount you invoice your customers. This is the actual amount you charge your customers during a specific period. Billings are a step closer to cash flow than bookings because they represent the money you are asking your customers to pay.
- Example: If you invoice your customer $1,000 per month for a year-long contract, your monthly billing is $1,000.
Billings are crucial for managing cash flow because they show how much money you expect to receive in the near term.
Revenue: Recognized Earnings
Revenue is the amount of money your company actually earns and recognizes on its financial statements. Revenue recognition follows specific accounting rules, which means you recognize revenue as you deliver the service, not necessarily when you bill the customer.
- Example: For a $12,000 annual contract billed monthly, you recognize $1,000 in revenue each month as you provide the service.
Revenue is the most critical metric for financial reporting because it reflects the actual earnings of your business over a period.
Why These Metrics Matter
Understanding the differences between bookings, billings, and revenue helps you:
- Track Growth: Bookings show the potential growth and demand for your product.
- Manage Cash Flow: Billings help you manage your cash flow and ensure you have enough funds to operate.
- Report Financial Health: Revenue provides a clear picture of your company’s financial performance.
Key Takeaways
- Bookings: The total value of signed contracts (future revenue).
- Billings: The amount invoiced to customers (near-term cash flow).
- Revenue: The recognized earnings as services are delivered (actual financial performance).
By understanding these metrics, you can better manage your SaaS business, make informed decisions, and communicate effectively with investors. Remember, while bookings and billings are important, revenue is the key metric that reflects your company’s true financial health.