Understanding the concepts of bookings, revenues, and billings allows SaaS companies to understand their financial operations and predict future growth. Although these metrics are related, they serve distinct purposes and provide insights into different aspects of a company’s financial health.
In essence, bookings represent the future revenue potential, billings refer to the actual invoiced amounts, and revenues are recognized when services are delivered. In this article, we will learn more about these metrics and why they sometimes don’t match reality.
When booking, billing, and revenues don’t match reality
Discrepancies can be due to various reasons, including changes in contract terms, accounting practices, or delays in service delivery.
Booking vs reality
Bookings often present an optimistic forecast of business operations, yet they can contrast with actual outcomes. They might be recorded based on initial agreements, which can later be altered in scope, timing, or price. Customers may cancel or modify their orders, and such changes are not always immediately or accurately reflected in the booking records.
When bookings do not convert into actual revenue, it can create cash flow issues, as the anticipated income that businesses rely on for operational expenses does not materialize. Businesses might allocate resources based on bookings, which, if not actualized, can lead to surplus inventory or underutilized services.
Marriott, an American company, has worked to bridge this gap by leveraging data analytics to personalize their loyalty program. By better understanding their guests, they have tailored offers and experiences to individual preferences, aligning their bookings more closely with reality.
Hotels strive to create seamless experiences starting from the booking process, which involves an intuitive website and transparent pricing. However, issues such as overbooking or discrepancies in room quality can lead to a reality that falls short of expectations. To avoid this, some hotels have implemented mobile check-in options to streamline processes and reduce the potential for guest dissatisfaction upon arrival.
Billing vs reality
A company’s billing does not always reflect reality, and this can happen in scenarios often due to errors, miscommunication, or fraud.
Mistakes in data entry, system errors, or incorrect billing settings can lead to invoices that do not accurately represent the services or products provided, as well as billing for services not delivered or fully completed.
Confusing or complex pricing models can induce differences between what is billed and what customers expect to be charged.
Let’s take an example: A SaaS company had siloed data in different systems – some in CRM, others in billing tools, which were not easily extractable. This led to a complex error-prone process of merging datasets to get accurate billing and revenue metrics.
They struggled to align their revenue with cash inflows, leading to mismatched records that required operating costs adjustments. Moreover, this time-consuming process was prone to errors, and also led to discrepancies in revenue reporting..
In a Deloitte On Cloud podcast episode, Akash Khanolkar, cofounder of Octane, discussed how traditional subscription-based billing methods led to discrepancies for a SaaS company.
This company used a subscription model that didn’t accurately reflect customer usage, causing dissatisfaction among users. To address this issue, they transitioned to a consumption-based billing model, which tied billing directly to actual product usage. This change corrected the billing inaccuracies and improved customer satisfaction by ensuring they were only charged for what they used.
Similarly, Dyfed Wallis, Head of Sales at Cloudmore, encountered entrepreneurs struggling with billing processes, leading to substantial costs for their companies.
One company faced two major billing issues. First, they had several customers who hadn’t been invoiced for services received over the last nine months. Despite the awkwardness of addressing this with the customers, the company hoped to recover the payments.
The more serious problem involved two former customers who had left six months ago but were still receiving services. The company was regularly paying the vendor for these services but failed to bill these ex-customers. Over this period, these services amounted to nearly €15,000, which the company couldn’t recover. As an intermediary earning a 20% margin on these services, they would need to generate an additional €75,000 in sales to offset the loss.
A second company offering both IaaS and SaaS services inadvertently failed to bill customers for adjustments made to their services post-initial setup. Although the company had initially set up recurring contracts for their services, subsequent changes in quantities were not consistently reflected in their monthly invoices.
An audit uncovered that this under-invoicing amounted to approximately €30,000 per month. Concerned about the impact on their reputation, they hesitated to approach customers who were promised ‘flexible Cloud pricing’ to explain the billing discrepancies.
For these companies, completing the billing cycle was a challenge due to time-consuming, manual processes. These included extensive use of Excel and numerous emails between departments to ensure correct quantities and pricing. Recognizing that such traditional methods couldn’t support a recurring billing model, both companies chose to automate and streamline their billing processes with tools such as Salesforce.
Revenue vs reality
Revenue recognition introduces significant complexity to financial accounting, particularly in how it affects the timing and reporting of earnings.
For example, a company may issue high billings for long-term contracts but, according to accounting principles, cannot recognize these as revenues until the services are delivered throughout the contract.
This staggered revenue recognition can create a mismatch between substantial upfront billings and the gradual income that is recognized, impacting reported profitability and tax liabilities.
Incorrect application of revenue recognition rules can complicate matters, leading to artificially increased revenue figures. This distortion of a company’s financial health can lead to cash flow challenges, as substantial initial payments are not immediately reflected as realized revenue.
How to avoid these discrepancies?
You can manage these discrepancies by boosting short-term billings (revenue invoiced and expected to be paid within a short period), converting monthly contracts to annuals to improve cash flow, and tracking the performance of sales representatives to understand your strengths and weaknesses.
Accurate forecasting and continuously analyzing pipeline data and historical trends are also important for aligning financial strategies with operational reality.
Insights from Camille Soulier, CFO at Only Dust
As Camille Soulier, CFO at Only Dust, advises, creating an efficient billing and collection process is crucial for managing revenue recognition challenges. To optimize billing, identify key moments in your sales process when invoicing should occur, such as upon product shipment or at specific milestones for service projects. Utilize a well-configured CRM system to centralize billing information efficiently and ensure timely invoicing.
For optimizing collections, calibrate payment terms based on client risk. Offer longer payment terms to low-risk clients and stricter terms to high-risk ones, ideally aiming for payment upon invoice receipt. Implement automated reminders using tools to streamline follow-ups, escalating to phone calls if necessary.
Case study: Automating billing audits to reduce revenue leakage
A SaaS CFO, whom we had the chance to meet at Fincome, faced significant challenges with revenue leakage due to unreliable billing dashboards. This led to several untracked invoices and considerable financial losses.
To tackle this issue, the company implemented an automated system for auditing their billing processes using a dedicated tool. This strategic move allowed for tracking of invoices and contract renewals, which minimized revenue losses and showcased a clear return on investment (ROI).
In parallel, many finance departments leverage Business Intelligence (BI) tools such as PowerBI, Looker, or Tableau to construct and update their required metrics. While these tools are powerful, they can be time-consuming and complex without dedicated internal resources. The choice of billing tools affects data quality, making it crucial to select appropriate tools early on to avoid related pitfalls.
By automating billing audits and using suitable BI tools, companies can enhance their financial health by reducing revenue discrepancies and improving the accuracy of their revenue recognition processes and order-to-cash cycle.
Recommendations for Optimizing Billing Operations
In summary, the measures you can implement to optimize your billing include:
- Implementing more detailed reporting mechanisms to track each metric’s trajectory over time and understand the causes of discrepancies.
- Adopting rigorous revenue recognition practices in line with GAAP standards to ensure earnings are accurately reported.
- Streamlining billing processes to ensure timely and accurate invoicing, thus aligning billings more closely with bookings and revenues.
- Maintaining open lines of communication with customers to swiftly address contract changes or payment issues that could impact bookings or billings.
- Developing robust forecasting models that account for potential variances between bookings, revenues, and billings and regularly adjusting forecasts based on actual performance, as well as cash-flows.
Additional insights: bookings, revenues, and billings
Each metric offers a different lens on a company’s financial health: bookings forecast future growth, revenues indicate current earnings recognized over a defined period, and billings reflect cash flow.
- Bookings: The total value of contracts customers commit to, representing potential future earnings. For example, a SaaS company can have bookings that include customer commitments from annual subscriptions to renewals.
- Billings: These are tied directly to the company’s cash flow and represent the invoiced amounts customers are billed during a specific period. Billings might match bookings if a customer pays upfront or may be spread out if payments are made over time.
- Revenues: Recognized as the service is delivered, this metric adheres to GAAP Standards. It reflects earnings progressively, such as a SaaS company recognizing monthly revenue from an annual subscription as services are provided.
The importance of booking, billing, and revenues
Understanding the distinctions between bookings, billings, and revenues is crucial for effective financial planning. Bookings forecast future growth, revenues indicate current earnings, and billings reflect cash flow.
Booking to forecast growth
Bookings in SaaS businesses serve as the company’s financial foresight. This metric accounts for various forms, such as new, renewal, and upsell bookings.
- New bookings occur when a new customer signs a SaaS product or service contract. They represent the expansion of the customer base and are often a result of the company’s marketing efforts.
- Renewal bookings are made by existing customers who choose to continue their service. High renewal rates indicate customer satisfaction and product reliability.
- Upsell bookings occur when existing customers expand their service usage, upgrade their subscription tier, or add more services.
Each booking type contributes to the total contract value (TCV) or annual contract value (ACV), depending on the contract’s duration.
Bookings do not immediately impact the financial statements. They only predict future billings and revenue recognition once the services are delivered.
Common mistakes in tracking bookings
Companies often make errors in tracking bookings:
- Don’t confuse bookings with revenue. Bookings only indicate potential future revenue.
- Account for cancellations. Otherwise, you might overstate the company’s financial health and lead to overoptimistic revenue projections.
- Stay consistent when tracking your bookings. Discrepancies will change the company’s performance.
- Account for discounts that can also materially impact cash generation.
Billings, for your operation cashflow
Billings represent the invoiced amounts owed by customers for services rendered or to be rendered. They can fluctuate based on the payment terms agreed upon with customers. For example, your customers could choose to pay over time.
This metric helps you manage your accounts receivable and optimize your company’s liquidity, solvency, and financial flexibility.
📌High bookings may not always translate into immediate cash if billings are delayed or spread out over extended periods.
This discrepancy can create a cash crunch, particularly if the company has immediate cash needs for operations or expansion.
Revenues and accounting standards
Revenue recognition occurs as the services are delivered, according to the revenue recognition principles of ASC 606/IFRS 15. This metric reports financial performance to stakeholders and ensures compliance with accounting standards.
Deferred or unearned revenue is a liability on a company’s balance sheet. It represents money your business receives for services that have not been performed. Essentially, it’s a prepayment from customers for products or services the company must provide in the future.
How do we ensure good revenue recognition?
Implementing the five-step model for revenue recognition helps address these challenges by providing a structured and systematic approach. This model consists of:
- Identify the contract: determine whether an agreement between your company and the customer creates enforceable rights and obligations.
- Identify performance obligations: pinpoint the distinct goods or services the company is committed to delivering within the contract.
- Determine the transaction price: ensure the total consideration the company expects in exchange for delivering the promised goods or services.
- Allocate the transaction price to performance obligations.
- Recognize revenue as obligations are fulfilled.
Following these steps ensures that revenue is recognized accurately and consistently across various customer agreements. It also ensures compliance with accounting standards, enhances the reliability of financial reporting, and clarifies when control of goods or services is transferred to the customer.
Understanding the dynamics between bookings, revenues, and billings is essential for aligning financial metrics with business performance. Discrepancies can arise due to contract terms, service delivery timelines, and revenue recognition practices.
Addressing these discrepancies involves careful tracking and consistent practices to ensure accurate financial planning and reporting.
