Posted by Deepshikha Shukla
May 2, 2022 | 5-minute read (854 words)
Software as a service, better known as SaaS, is a way of delivering applications or software and their licensing and training over the internet as a subscription service.
A major benefit of SaaS offerings is they save subscribers time and money versus purchasing a traditional form of on-premises software installation and managing periodic updates. Here we will review the key metrics used to evaluate actual cash flow for SaaS businesses.
What are bookings in SaaS?
A booking represents the value of a subscription contract signed by a SaaS customer for a given period. It shows the commitment of subscribers to pay the money for the services provided by the business over the contract’s stipulated term. A booking cannot be recognized as revenue until the service is furnished to the customer/subscriber.
For example, if a customer signs up for a one-year plan at $100/month, they commit to paying $1,200 to your company during the contract, which is also known as the booking amount. However, for a specific month, your total bookings would be the sum of all signed contracts (including recurring and nonrecurring) with different prices and durations.
Why are bookings important?
Bookings are a crucial metric for every SaaS business as they indicate the growth of sales over time. Keeping track of bookings lets SaaS businesses determine:
• The number of bookings recognized as revenue.
• The number of customers signed up for each plan.
• How many recurring and nonrecurring bookings were closed by the sales team.
Using these insights, marketers can determine the efficacy of their customer acquisition strategy and the demand for their services in the market. Apart from sales, bookings are an essential metric for both CFOs and finance teams in managing and calculating cash flow, monthly recurring revenue and annual recurring revenue.
Five common booking types used by SaaS firms:
1. New bookings – Comprises new subscribers/customers as well as existing customers who sign up for new services.
2. Renewal bookings – Comprises existing contracts that are renewed after their subscription period concludes.
3. Upgraded/expansion bookings – Comprises upgrades and expansions to existing plans from upselling. For example, when a subscriber upgrades from a $500 basic plan to a $2,000 advanced plan, they sign a new contract for $24,000 per year, referred to as an upgraded booking.
4. Annual contract value/total contract value bookings – A multiyear contract in which bookings with a minimum of one-year committed revenue is known as an ACV bookings. TCV bookings account for the entire duration of the contract.
5. Nonrecurring bookings – Comprises bookings that include fees other than incurred with regular subscriptions or plans, such as training, setup-installation and repairs.
What are billings in SaaS?
Billings are the invoices that a business bills to its subscribers over different periods, such as a month or a year. It’s the amount of money collected from customers who have subscribed to a monthly or annual plan for your service. Billings provide an insight into the growth of SaaS firms as they enable businesses to calculate their actual cash flow.
What is revenue in SaaS?
Revenue is the amount of income earned by delivering the promised service, at the time of booking, to customers. Under GAAP accounting standards, revenue can only be recognized for a service that has been delivered. That means businesses can recognize revenue for a particular month only after the successful delivery of services to the customers for that month.
For example, if a customer has opted for an annual plan of $12,000, billed monthly and starting in January, the SaaS values (after delivering services) for Jan. would be:
Bookings … $12,000
Billings … $1,000
Recognized revenue … $1,000
Although the customer is charged the entire $12,000 upfront, only $1,000 gets recognized for the services provided in January. The remaining $11,000 is considered deferred revenue as the services of 11 months are yet to be provided.
Why is revenue so important?
SaaS businesses are unique because sales are not “one and done.” Rather, they depend on recurring revenue from subscribers. Further, growth and revenue are of keen interest to investors, so understanding revenue recognition for SaaS is essential to provide an accurate picture to stakeholders and to avoid tax compliance issues.
As you close more deals, revenue grows, but to close more bookings you must understand how recurring and nonrecurring services affect your business’ monthly recurring revenue and annual recurring revenue.
Revenue recognition of a SaaS business is complicated by the dynamic nature of costs incurred by the customer at each stage, such as implementation costs, support and training costs, add-ons, discounts, plan upgrades or downgrades, consultations, and customization of the plan or subscription cancellation.
Bookings versus revenue
For SaaS businesses, revenue recognition is different from booking because customers are charged upfront for services that will be delivered over a set period of time to increase the business’s cash flow. But payment collected in advance as per the contract can’t be recognized as revenue until the services are delivered. Payment collected at the time of booking but before delivering the services is considered deferred revenue.