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.
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
Booking to Revenue Conversion
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.
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.
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.
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.
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.
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.