Mastering SaaS billings: A beginner's guide

Improving revenue and profit is the primary goal of many businesses. However, terms like billions, bookings, and revenue can be confusing.

This article will provide some clarification on the above SaaS metrics.

What exactly are 'billings'?

So, what are billings? Simply put, billings refer to the revenue that a SaaS company generates from its subscription-based business model. In the rawest sense, billings means 'cash inflow.'  

Billings affect your company's balance sheet (deferred revenue, accounts receivable, cash balance) and income statement. Customers pay for the company's products or services recurringly, typically on a monthly or annual plan.

Deferred revenue account

In addition to new subscriptions and renewals, billings may include deferred revenue, which refers to revenue that has been earned (i.e., it's already in your bank account) but not yet recognized.

For example, if a company has yearly billing deals and customers will pay an upfront fee for a year of service, the company would recognize the revenue over the course of that year rather than all at once. This means that the company has a high deferred revenue.

Including deferred revenue in billings calculation can give a complete picture of the company's financial performance.  

Types of billings

There are a few different types of billings that are commonly used in the SaaS (Software as a Service) industry:

1. Upfront billing

Upfront billing this type of billing refers to the payment of a one-time fee upfront before the customer receives the product or service. Upfront billing is often used to incentivize longer-term customer contracts or loyal existing customers. For example, a customer may pay for a year of service upfront rather than monthly.

2. Recurring billing

Recurring billing is a common model for SaaS companies, as it provides a predictable revenue stream. This type of billing refers to paying a regular, ongoing fee for the product or service. For example, a customer may pay a monthly fee to access a software application.

3. Usage-based billing

Usage-based billing can be a flexible pricing model for SaaS companies, allowing customers to pay only for what they use. This type of billing refers to the payment of a fee based on the customer's actual usage of the product or service. For example, a customer may pay for the amount of data storage they use or the number of user licenses they need.

Are billings even important?

Well, it's a key metric that helps investors and analysts gauge the performance and growth of a SaaS company. By looking at the company's billings, they can get an idea of how well the business is doing and how much demand there is for its products or services. 

If a SaaS company sees strong billings, it will likely grow and succeed. On the other hand, if billings are slowing down, it could be a sign that the company is struggling.

Billings can help predict future revenue. By tracking billings over time, SaaS companies can see how their revenue will likely evolve. 

Factors that may impact billings

There are a few key factors that can affect billings in the SaaS (Software as a Service) industry:

1. Pricing

The price of a SaaS company's products or services is a critical factor that can impact its billings. If the company raises its prices, its billings may increase. On the other hand, if the company lowers its prices, its billings may decrease.

2. Customer acquisition and retention

The rate at which a SaaS company acquires new customers and retains existing ones can also impact its billings. If the company successfully acquires new customers and retains existing ones, its billings may increase.

3. Competition

The level of competition in the SaaS industry can also affect billings. Suppose a company competes against other SaaS companies with similar products or services. In that case, it may have to adjust its pricing or marketing efforts to remain competitive and attract customers.

4. Market conditions

External market conditions, such as economic and consumer demand, can affect a SaaS company's billings. For example, a strong economy and high consumer spending may lead to increased billings for the company.

What are bookings?

'Bookings' in the SaaS (Software as a Service) industry refer to the value of signed contracts or subscriptions that a company has secured but has not yet recognized as revenue. You can track it using either the annual contract value or the total contract value.

These bookings are a key indicator of the future revenue a company is likely to generate, as they represent the value of all the closed deals the company has already secured.

In other words, it's the money that the company expects from paying customers who have agreed to pay upfront for its products or services on a recurring basis.

Imagine that you run a SaaS company that offers project management software. In January, you sign up 50 new customers who agree to pay $10/month for your software.

Additionally, 100 existing and paying customers renewed their subscriptions in January at the same price.

In this case, in January, you'd report bookings of $1,500 (50 x $10 + 100 x $10). This represents the value of the new contracts and renewals your company signed that month, and it's a key metric that helps investors and analysts understand your business's performance and growth potential.

Differences in billings and bookings

  • Bookings do not portray the true financial picture of the business. It is more relevant from the future perspective. It gives the company's earning potential and the sales team's efficiency alone. It is silent when it comes to 'cash flow.'
  • On the other hand, billings show the current liquidity position of the business. In other words, billings represent the revenue that a company has actually earned, as opposed to the revenue expected to earn in the future (as represented by bookings).
  • One key difference between bookings and billings is the timing of when revenue is recognized. Billings are "in the bank," while bookings are "on the books."
  • Billings are typically reported on a company's financial statements, while bookings are not. This is because billings represent revenue that has already been recognized, while bookings represent revenue that has not yet been recognized.

Let us understand the difference with an example:

CloudTech, a SaaS company, signs a one-year contract with a new customer to provide its cloud-based project management software for $1,000 per year. CloudTech records the value of the contract as a booking, representing the expected revenue from the customer over the year. The customer will be billed monthly. 

As CloudTech delivers its software and bills the customer each month, it recognizes the revenue from the contract as billings. By the end of the year, CloudTech will have a revenue recognition of $1,000 in billings, the same amount recorded as a booking when the contract was signed.

Thus, the total billings will equal the total bookings if the entire amount is paid in advance.

How do you calculate billings?

To calculate the billings for a software-as-a-service (SaaS) company, you would need to consider the following elements:

  • The cost of the software
  • Taxes 
  • Discounts 
  • Late fees 

To calculate the total billings for sale, you would need to add all of the applicable elements, such as the cost of the software, taxes, and any discounts or late fees. The resulting total would be the amount the customer is expected to pay for the software.

For example, if a SaaS company is selling a subscription to its software at the cost of $100 per month, and the customer is being charged a sales tax of 10%, the total billings for sale would be calculated as follows:

Total billings = (Cost of software x Quantity of software) + Taxes + Discounts - Late fees

Total billings = ($100 x 1 subscription) + $10 + $0 - $0

Total billings = $100 + $10

Total billings = $110

What is revenue?

In a software-as-a-service (SaaS) business, revenue is the total amount of money the company has earned from selling its software.

Revenue is typically reported on the income statement to measure the company's performance.

In a SaaS business, recognized revenue is the money coming in from selling subscriptions to the software. The subscription may be sold monthly or annually, and the price of the subscription may be based on the number of paying users or the features included in the software. 

SaaS companies may also generate more revenue by selling additional services, such as training or support. Revenue is a key driver of a SaaS business, and its ability to generate consistent and predictable revenue is often seen as a key indicator of its health and growth potential.

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