Picture this: you walk into your monthly board meeting, exchange hellos, and then you get hit with this question — “what did we book last month?”
Both your CEO and Head of Sales each give different answers, and it becomes clear to your board and investors that you’re playing a guessing game with your predicted future revenue growth.
This exact scenario is more common than you might think.
How does this happen? And why?
The culprit is misalignment on the definition of “New Bookings” in your organization. When left to their own devices, your Sales and Finance teams will likely each use their own definition of Bookings. They may be operating out of different systems (CRM and the Accounting System), which naturally creates discrepancies in how each department calculates and defines key SaaS metrics.
We’ll call this scenario “the KPI tug-of-war” (more on this later).
Not only does this misalignment look bad to your board, but it also casts doubt on your customer-facing team's use of bookings as a useful insight into what acquisition strategies, product lines, and business segments are contributing the most to your total revenue growth.
In short, when there’s confusion at the bookings level, there’s likely confusion about other key financial metrics in your organization. For our purposes, we’ll be focusing on New Bookings in this article, as it’s one of the leading indicators of future revenue growth in many SaaS companies.
Here’s what you need to know to get a better understanding of New Bookings, both in the boardroom and on your balance sheet.
Understanding Bookings in a SaaS business model
New Bookings represent the total dollar value of all new contracts signed in a given period of time. Unlike billings or revenue, however, bookings only represent a commitment from your customers to pay you money for the service you’re providing. Until a customer is actually billed and pays an invoice for your product or service, their ‘commitment’ can’t be counted as actual revenue.
How to calculate SaaS Bookings
While Bookings can be broken down into several sub-categories (New Bookings, Renewal Bookings, etc.), this calculation will show you how to find New Bookings, or, the value of all new bookings transactions in a specified period of time, including all subscription and non-subscription (one-time) transactions.
To find your New Bookings number, you’ll need to take the total value of all your signed first-time customer contracts and add them together—your primary goal should be to find the value of your total ARR for each new contract. This combined ARR number indicates to both your board and your executive team how sales activity is affecting your revenue growth.
Depending on your Bookings policy, you may also account for revenue from one-time fees, such as overage and consumption fees, implementation fees, training and professional services, etc.
This is where the definition of ‘Bookings’ starts to get a bit fuzzy. Bookings is not a GAAP-defined term, and policies can look different depending on who you ask, which only adds to the confusion. Before you start tossing around Bookings numbers in the boardroom, it’s important that your investors, board members, and employees have a mutually agreed understanding of how Bookings are calculated in your organization.
Bookings vs. Billings vs. Revenue
At first glance, Bookings, billings, and revenue aren’t all that different from each other. However, it’s their subtle differences that set them apart.
To start, we know that Bookings represents a commitment from your customers to pay for a product or service. This ‘commitment’ can’t be officially entered as recognized revenue until the product or service in question has been invoiced and delivered; however, it’s a strong, early indicator of revenue growth.
Because of this, the success of a sales team is often measured by new Bookings generated in a month, and revenue-based finance lenders will look at your new Bookings metric to see if they’ll receive a positive (and speedy) return on their investment in your company.
What is Billings?
Billings are the next step in the financial journey from Bookings to revenue.
Once a customer has received an invoice for your products or services, their total amount owed has officially been “billed” and is counted as billings. Simply put, billings are when you actually collect money from your customer and represent the total amount you’re owed on an invoice.
What is Revenue?
Revenue is income that you’ve earned after delivering a product or service to a customer.
For every month you successfully deliver your product or service, you can ‘recognize’ the revenue for that month. This is as per GAAP rules, which state that revenue can only be recognized once it is ‘earned and realizable.’ Until then, ‘unearned revenue’ is defined as deferred revenue, which is any money that has been paid upfront before a product or service has been delivered to the customer.
Different types of Bookings
Once you’ve clearly defined Bookings, it can be further divided into several subcategories. Each of these categories gives teams a closer look at the specific channels and business segments that are contributing the most to future revenue growth.
- New Bookings: New Bookings include the total number of new customers who sign up for your product or service. For example, if five customers commit to contracts each worth $10,000 during the month of May, then your new Bookings for that month come out to $50,000.
- Expansion/Upsell Bookings: Revenue expansion generated through the upsell and cross-selling of products and services can be classified separately.
- Renewal Bookings: Renewal Bookings are calculated based on the number of customers whose contracts are up for renewal. This type of Bookings can be calculated either at the effective renewal date, or whenever a customer requests to renew their contract.
Why do Bookings matter?
With so many other metrics to keep track of, you might wonder how “Bookings” fits into the bigger picture. Here’s how this commonly misunderstood metric helps move the needle:
- Predicting future revenue growth: In a nutshell, Bookings is the sum of all the revenue promised to your business via signed customer contracts. If you’re able to accurately track your Bookings month-over-month, you can predict your ARR momentum and revenue growth far into the future.
- Strategic insights for sales, marketing, and product teams: New Bookings help sales and marketing teams understand how effective their tactics are in attracting and closing new customers for your business. Similarly, product teams can reference New Bookings to see which product lines are responsible for generating the greatest future revenue growth.
- A head start for your finance department: Your Finance department can use Bookings to plan cash inflows and outflows before officially recording that revenue on their books.
- Finding product/market fit for early-stage companies and new products: Bookings hold different significance based on your current growth stage. For instance, an early-stage startup that doesn't entirely follow accounting best practices might treat Bookings as their source of truth in terms of revenues that can potentially be generated for their business. Your Bookings number can also be used to test how new products are performing in the market—not only is this helpful for product teams, but it’s even more beneficial for early-stage companies who are trying to find product/market fit.
Ending the KPI tug-of-war: how do different departments define Bookings?
Once you’ve wrapped your head around how bookings fit into the alphabet soup of SaaS metrics and KPIs, you need to align your stakeholders and team behind a shared understanding of how you define Bookings internally.
Chances are, your sales and finance teams don’t see eye to eye on what is considered a “booking.” How does this happen?
Depending on your sales team’s compensation structure, they may feel incentivized to report higher “New Bookings” numbers to hit their OKRs or earn greater commissions. Whereas, on the finance side, your accounting team needs the exact number of New Bookings and new ARR added to understand ARR growth, one of the leading drivers of Enterprise Value.
This tug-of-war scenario isn’t limited to sales and finance either. Unless you’ve standardized your definition of Bookings and communicated it throughout your company, your marketing, sales, customer success, and finance departments may all be using their own personal definition of the metric.
So, here’s the big problem: if there’s confusion at the Bookings level, then there’s likely confusion across all your SaaS metrics and KPIs.
Making sense of your SaaS metrics
When it comes to standardizing, understanding, and leveraging your metrics, Bookings is just the tip of the iceberg.
If you need help making sense of your SaaS metrics, keeping your books balanced, and plotting the financial roadmap of your SaaS business, schedule an introduction with our team at Driven Insights. You’ll receive a free proposal on our services and learn how we help SaaS companies chart a clear path to consistent revenue growth.
