I hate to admit it, but this threw me for a loop for YEARS.
Bookings represent the total value of customer contracts signed during a given period, regardless of when the actual revenue is recognized. This metric is crucial for forecasting future revenue and understanding your company's sales momentum.
Bookings reflect the demand for your products or services and the sales team's ability to secure new business.
However, Bookings do not necessarily translate to immediate cash flow or revenue recognition. There are often timing differences between when a contract is signed and when the actual services are delivered or goods are shipped.
On the other hand, Billings refer to the total amount of invoices issued to customers during a specific timeframe. Billings are a more immediate indicator of cash flow, as they represent the revenue that has been billed and is expected to be collected.
Billings are a more accurate reflection of your current financial position, as they account for the work you've already completed and the payments you've received or will receive. Tracking Billings can provide valuable insights into your company's cash flow and liquidity.
I wrote a Haiku to help explain:
Bookings, future's gleam,
Revenue's bright hopeful dream,
Billings, cash's stream.
Three Key Distinctions
I often revisit these three criteria to keep the metrics straight in my head.
1. Timing: Bookings are recorded when a customer ***contract is signed***, while billings are recorded when an ***invoice is issued*** to the customer.
2. Quota Retirement and Commissions: Sales reps retire quota based on the bookings they take down. And they get paid a percentage of those bookings as commission. Billings are a function, after the fact, of those bookings. And sometimes you may need to claw back said commissions if the end customer doesn’t pay when they are billed.
3. Cash Flow: Billings have a more direct impact on cash flow, as they represent the actual invoiced amounts that customers are expected to pay. Bookings, on the other hand, do not immediately affect cash flow. In fact, you can go broke with just Bookings. Bookings do not pay the bills (no pun intended).
Where the Confusion Comes From
It's common for companies to experience a disconnect between Bookings and Billings, especially in subscription-based or project-based business models. For example, a customer may sign a multi-year contract (Booking), but the invoicing may be structured to be billed annually or monthly (Billings). This timing difference can create a gap between the two metrics, and can also create a cash crunch if not managed correctly.
It's not uncommon to see bookings outpacing billings, or vice versa, depending on the timing of contract renewals, project milestones, and payment terms.
Why the It Matters
While Bookings and Billings are often used interchangeably, understanding the nuances between the two can have significant operational and financial implications.
For example - which one do I use to get to ARR? Which one do I pay my sales reps based on? Which one do I use for my cash flow forecast?
In summary:
1. Revenue Visibility: Bookings provide a forward-looking view of your revenue pipeline. This includes single and multi year deals which you amortize based on contract start and end dates to get to gaap revenue.
2. Subscription Dynamics: Bookings are used to track your subscription-based business, as they capture new customer acquisitions and expansion within your existing customer base. You use Bookings to get to your ARR. Billings, in turn, help you monitor the retention and renewal rates of your subscriptions. Customers need to pay you to officially renew.
3. Cash Flow Management: Billings directly impact your cash flow, as they represent the money that has been invoiced and is expected to be collected. You can’t manage your liquidity position without understanding your Billings because Bookings don’t take into consideration the payment terms that your customers agreed to abide by. A $100,000 booking that is billed upfront on an annual basis is more valuable than a $100,000 booking that is paid quarterly in arrears. Why? There’s a time value of money aspect to the sales, as well as payment risk.
