Bookings vs Invoicing vs Revenue | The SaaS Revenue Cycle Explained

The SaaS revenue cycle all starts with bookings. But what is a booking? And how does a booking differ from invoicing and revenue? SaaS is full of metrics, but in this case, we are mixing SaaS and accounting terminology to make things even more confusing. In this post, I will explain the differences among a booking, an invoice, and revenue.

This SaaS terminology is important for sales, customers success, and the leadership in your organization to understand. I must mention one qualifier, though. If you target mid-market and enterprise deals or sign contracts with your customers, this post is especially relevant for you. If your customers sign up via your website and pay by credit card, the bookings terminology may not be as relevant. But after the bookings process, the revenue cycle follows the same general process.

With that, let’s dive in to see how a booking becomes an invoice and then recognized revenue. I’ll also cover the calculation of contract values.

What is a Booking?

In sales and accounting, you hear a lot of talk about bookings. The SaaS revenue cycle begins with a signed contract between you and your customer. And that’s how I define a booking.

A booking is an executed (signed by both parties) contract between you and your customer for software and/or services.

The contract contains products, pricing, and payment terms among other things. A contract is a customer-facing document, but a it’s a lot like an operating manual for accounting. It tells the accounting team who to invoice, how much, what products, and when.

Once the contract is signed and becomes a booking in your CRM system, the contract is passed on to your accounting team to process. Processes here can vary widely depending on your invoicing and accounting software.
Once the required data is entered in your accounting system, you create the invoice, post it (I’ll explain later), and email it to your customer.

Download my bookings template at the bottom of this post.

How to Measure a Booking

It’s important to note that a booking measures only the first year of the contract. This is where tracking bookings may differ from total contract values. Whether it’s a one-year contract or a multi-year contract, we count only the first year of the software subscription.

Make sure your team is aligned on the calculation of bookings. If your sales team closes a multi-year contract with price increases or additional product in outer years, they may argue that the bookings number should be higher. It’s a valid point but becomes very tricky to track in your CRM by averaging the years of the contract.

We may also have sold more than just software on the contract. If we also offer a professional services component, the entire amount of the services contract value will be counted as a booking.

When tracking bookings, I like to separate the first year of a booking into values for subscriptions and professional services. And from there, I further segment bookings into new business versus existing business. I also track logo counts for new business wins.

Bookings to Invoice Process

Your sales team has closed the sale which creates a “closed won” opportunity and a booking (executed contract). Now, your accounting team springs into action.

Accounting receives notice that it’s time to process the new contract.

The customer contract is like an operating manual for accounting. It tells us who we are invoicing, what we are invoicing, and how often we are invoicing.

To invoice the customer properly, accounting will focus on the purchase agreement and the payment terms. It’s important that the pricing and payment terms are clear and concise.

The payment terms dictate a majority of the who, what, and how of invoicing. And just as important, payment terms influence how we recognize subscription and/or professional services revenue.

Contract to Invoice

With information in hand, whether via the contract or contained in your CRM software, accounting will transfer this data to their accounting and invoicing software. If your system allows, I try to automate as much as the invoicing and renewal process as possible. For example, entering the necessary details of a multi-year contract, so that you can “set it and forget it.” Invoices will generate automatically as you run your weekly or monthly invoicing process.

When accounting generates a customer invoice, we “post” it to the general ledger. You could say things become “real” once the invoice is posted to our accounting system. We now have an official financial record and electronic trail of information.

When we post an invoice, we debit accounts receivable (increases receivables) and credit either revenue on the P&L or deferred revenue on the balance sheet. At this point, invoicing is complete, and the revenue recognition process begins.

Revenue

At this point, we have “closed won” the deal, counted it as a booking, and invoiced the customer. Do we have revenue yet? Maybe. I wrote a very detailed post on SaaS revenue recognition, so I’ll summarize the basics below.

Once we have invoiced the customer, the revenue recognition process begins. With the adoption of the new revenue standard, ASC 606 – revenue from contracts with customers in the US, we follow a five-step model for recognizing revenue. There are many technical considerations when recognizing revenue, but for pure play SaaS models, we can boil it down to this.

Generally, if we invoice our customers on monthly terms, our invoicing will equal our revenue. We post the invoice directly to revenue on our SaaS P&L. Revenue recognition is complete.

However, the accounting picture is much different if we invoice in terms longer than one month. Rather than posting the invoice directly to revenue, we must now post the invoice to the liabilities section of the balance sheet. This creates a deferred revenue liability and “parks” the revenue on the balance sheet.

Revenue Recognition Example

In the example below, we signed a multi-year agreement valued at $210K in total contract value. We invoiced the customer for year one of the subscription (see invoice above). The subscription begins on January 1.

In January, we will recognize $5K of the $60K subscription, or 1/12th. This leaves us with a deferred revenue balance of $55K as of the end of January ($60K year one subscription value less $5K of recognition in January).

The services recognition will depend on how the payment terms were written. Services revenue is often recognized under the percentage-of-completion method or based on recognition milestones.

Revenue as a Liability

Why a liability? Well, with that signed contract or booking, we have created a future obligation to deliver a good or perform a service. Therefore, we create a liability for deferred revenue.

A deferred revenue liability is a a future obligation to deliver a good or perform a service.

As we deliver our software to our customers each month, we are fulfilling our contractual obligation. We can ratably recognize a portion of the revenue each month.

Why is Revenue Recognition Important?

Revenue recognition is critical to SaaS businesses. Maybe, my short introduction to revenue recognition was painful, but proper revenue accounting is critical. You must be able to create an accurate SaaS P&L. And with a proper SaaS P&L, you will better financially manage your SaaS business.

As you scale, your revenue recognition process must be bullet proof.

Without proper revenue recognition, it is very difficult to truly understand the financial performance of your business and produce relevant SaaS metrics. For example, your gross margins will jump up and down each month and revenue-related metrics will be unusable.

SaaS Contract Values

Finally, let’s discuss contract values. Contract values are often quoted in presentations, internal management reports, and are requested in due diligence. It’s important to get this right.

Total Contract Value (TCV)

Total contract value measures the dollar value of all products and services from an executed contract between you and your customer. This includes all years of the contract if it was structured as a multi-year contract.

In pure play SaaS, this is often the value of your subscriptions and professional services, but it should include any sold items from the contract.

The total value of all products and services can be summed as one number, but I always like to differentiate between recurring revenue and one-time items.

Annual Contract Value (ACV)

Annual contract value measures the first-year value of the contract. It gets a little fuzzy when you think about what products to include in ACV. Do you include subscription revenue and one-time services?

Since we operate a SaaS business, I think in terms of recurring revenue for annual contract value.

The annual contract value below demonstrates the calculation when we have increasing values during the contracted term. In this case, I am averaging the three years of subscriptions and using that as my ACV.

Contract Language Pitfalls

Be careful with contract language that may nullify a multi-year contract. For example, I look for language around optional years, early outs, termination without cause, or contingencies.

This language is often proposed by your customer’s procurement team or legal counsel. If it includes language such as this, make sure you understand what years of the contract are truly contracted and what years may be optional. Only locked in years should be included in total contract value.

Summary

The SaaS revenue cycle begins with bookings, then becomes an invoice, and finally recognized revenue. It’s important to understand the steps in the process, so that you can speak the same language as your accounting and sales teams.

It’s also beneficial when speaking with customers about their contracts and invoicing status. Finally, when you review your P&L, you’ll understand the accounting mechanics behind the revenue section.

Download

Subscribe & Download