Softrax

Booking

What are Bookings in SaaS?

For companies in the SaaS industry, bookings represent the total amount that the customer has committed to paying over the lifecycle of the contract. Bookings track the value of all new sales and customer contracts, regardless of whether or not the revenue from those contracts has been recognized. Given the nature of SaaS businesses, bookings are a critical financial and performance metric, especially for those businesses with subscription-based models. This is the total amount that the customer has committed to paying over the entire duration of the contract.

How Do Bookings Work?

A booking typically refers to customer orders or contracts for goods or services that a company expects to fulfill in the future. The process of how bookings work in revenue recognition can vary depending on the nature of the business and its accounting policies.

Here’s a general overview:

Booking a Sales Order or Contract

  • Customer Interaction: The process begins when a customer expresses an intention to purchase a product or service. This can happen through various channels, such as online orders, sales calls, or in-person sales.
  • Sales Order or Contract: The company records the customer’s order or contract details, which may include the product or service description, quantity, price, payment terms, and delivery or performance dates.
  • Booking Date: The date on which the customer order or contract is accepted and confirmed by the company is often referred to as the “booking date.”

Revenue Recognition

  • Recognition Criteria: Revenue recognition depends on the accounting standards followed by the company. Under generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), revenue recognition typically follows the five-step process:
    • Identify the contract with the customer.
    • Identify the performance obligations in the contract.
    • Determine the transaction price.
    • Allocate the transaction price to the performance obligations.
    • Recognize revenue when each performance obligation is satisfied.
  • Satisfying Performance Obligations: Revenue is recognized as the company fulfills its performance obligations. This can occur at a single point in time (e.g., delivery of a product) or over time (e.g., services provided over a period).

Recording Revenue

  • Revenue Accounts: As the company satisfies its performance obligations, it records revenue in its financial statements. The specific revenue accounts used can vary but often include accounts like “Sales Revenue” or “Service Revenue.”
  • Timing: Revenue is recorded in the period when it is earned and realizable, regardless of when the cash is received. This concept is known as the accrual basis of accounting.

Booking to Revenue Conversion

  • Matching: The company matches the bookings recorded in the sales order or contract with recognized revenue as the performance obligations are met.
  • Adjustments: Adjustments may be necessary if there are changes in the contract terms, performance delays, or other factors that affect the timing or amount of revenue recognition.

Financial Reporting

  • Financial Statements: The recognized revenue is reported in the company’s financial statements, including the income statement (profit and loss statement) and, potentially, the balance sheet if there are unearned revenues or contract liabilities.

It’s important to note that revenue recognition can become complex, especially for long-term contracts, multiple performance obligations, and situations involving variable consideration, such as discounts and incentives. Companies may need to make use of revenue recognition software and consult with accountants or financial experts to ensure compliance with accounting standards and accurate revenue recognition. Additionally, revenue recognition rules can vary by country and industry, so companies must adhere to the applicable regulations in their jurisdiction.

When are Bookings Recorded?

Bookings are recorded when the customer commits to the purchase, which is typically when the contract is signed or when a purchase order is received. This is often before the actual revenue is recognized.

How Do Bookings Differ From Revenue Recognition?

Bookings differ from recognized revenue in the timing in which they are recognized. Revenue recognition recognizes revenue as it’s earned over time, relying on the steps of ASC 606 and IFRS 15 to decide when revenue is earned. Bookings so the revenue is recognized over the duration of the contract. Bookings, in contrast, measure the amounts incurred when a customer commits to the contract and measures the entire life of the contract.

Why are Bookings Important?

Bookings supply valuable insight into a company’s sales performance and the health of its sales pipeline. It’s a forward-looking metric that can help SaaS companies assess their growth potential.

What is book-to-bill ratio: The ratio of bookings to recognized revenue, known as the “book-to-bill ratio,” is often used to evaluate a SaaS company’s sales performance. A ratio greater than 1 shows growth in the sales pipeline, while a ratio less than 1 suggests slower growth.

How does churn fit into bookings?: Bookings don’t account for churn (the loss of existing customers). So, if a SaaS company has a high churn rate, it may need to generate more bookings to keep or grow revenue.

Why are Bookings Important in SaaS?

Bookings in SaaS represent the total contractual value of new sales and customer agreements. This data supplies valuable insights into a company’s sales performance and growth potential, especially in terms of market share and new customer acquisition. Bookings as a metric should be considered alongside revenue recognition and customer churn to gain a comprehensive understanding of a SaaS company’s financial health and trajectory.

How are Bookings Measured?

SaaS bookings are typically measured by tracking the total contractual value of new sales and customer agreements over a specific time period. How bookings are measured will vary slighting depending on the business model of the SaaS company, but there are some common steps.

  1. Identify New Sales and Agreements: Measuring bookings requires a knowledge of all sales, customer contracts, and agreements made during the reporting period. This includes renewals, upsells, cross-sells, and any other revenue-generating activity.

  2. Determine Contractual Value: For each new sale or agreement, determine the total contractual value. This is the total amount that the customer has committed to paying over the entire duration of the contract. For example, if a customer signs a two-year subscription contract for $1,200 per year, the contractual value would be $2,400.

  3. Record the Bookings: Sum up the total contractual values of all the new sales and agreements made during the reporting period. This sum represents the bookings for that specific period.

  4. Adjust for Changes: If there are any changes or adjustments to existing contracts during the reporting period, such as contract amendments, cancellations, or downgrades, make the necessary adjustments to the bookings calculation. For example, if a customer upgrades their subscription from a lower-tier plan to a higher-tier plan, you would add the incremental value to the bookings.

  5. Exclude Non-Revenue Contracts: Some agreements or contracts may not directly generate revenue, such as trial periods or free pilot programs. These are typically excluded from bookings calculations since they do not represent revenue commitments.

  6. Account for Multi-Year Contracts: If a SaaS company offers multi-year contracts, it should include the full contractual value of these contracts in the bookings calculation for the current period, even if the revenue will be recognized over the contract’s duration.

  7. Consider Currency Conversion: If a SaaS company operates internationally and deals with multiple currencies, it should convert all contractual values to a common currency for consistency in its bookings calculation.

  8. Reporting and Analysis: Once a company has calculated the bookings for the reporting period, it’s important to document and report this metric. Bookings data is often used for financial reporting, forecasting, and strategic decision-making.

  9. Book-to-Bill Ratio: To gain additional insights, calculate the book-to-bill ratio by comparing the bookings for the current period to the recognized revenue for the same period. This ratio helps assess the growth potential and sales performance of the company.

  10. Periodic Tracking: Repeat the process on a regular basis, such as monthly or quarterly, to track how bookings change over time and to identify trends and patterns in the SaaS company’s sales performance.
10 Steps to Measure Bookings

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