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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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Introduction
In the SaaS landscape, financial metrics serve as crucial indicators of business health and growth trajectory. While revenue, churn, and customer acquisition costs often dominate discussions, another vital metric deserves significant attention: billings. For SaaS executives, understanding billings provides a clearer picture of future revenue and business momentum than many other metrics. This article examines what billings are, why they matter to your business, and how to effectively measure and leverage this key indicator to drive strategic decisions.
What Are Billings in SaaS?
Billings represent the total value of invoices sent to customers during a specific period, regardless of when the revenue will be recognized under accounting principles. In simple terms, billings capture the commitments made by customers to pay for your service, often before that payment translates to recognized revenue on your financial statements.
The billings metric is calculated as:
Billings = Revenue + Change in Deferred Revenue
Where:
- Revenue is what's recognized in the current period
- Change in Deferred Revenue represents the difference in unearned revenue between the beginning and end of the period
For SaaS businesses, billings often precede revenue recognition because many customers commit to contracts spanning multiple months or years, with payment upfront or according to a predetermined schedule.
Why Are Billings Important?
1. Forward-Looking Indicator
Unlike revenue, which reflects past performance, billings provide insight into future revenue trends. According to Bessemer Venture Partners' State of the Cloud report, billings often serve as "the canary in the coal mine," showing slowdowns or accelerations in business momentum 1-2 quarters before they appear in revenue figures.
2. Cash Flow Visibility
Billings directly impact cash flow, making them particularly important for SaaS companies managing growth and investment cycles. Strong billings performance typically translates to healthy cash reserves that can fund expansion without additional capital raises.
3. Contractual Commitment Indicator
Rising billings indicate customers' willingness to commit financial resources to your solution—a powerful validation of your product's value proposition. According to OpenView Partners' SaaS Benchmarks Report, companies with strong billings growth consistently outperform their peers in long-term valuation multiples by 30-40%.
4. Market Perception Driver
For public SaaS companies, billings are closely watched by investors and analysts as indicators of business health. According to Goldman Sachs' Software Outlook report, billings growth rates often correlate more strongly with stock performance than current revenue growth, particularly during market volatility.
How to Measure Billings Effectively
Standard Calculation Method
The most common approach is:
Billings = Revenue + Net Change in Deferred Revenue
For example, if your quarterly revenue is $1 million and your deferred revenue increased from $1.5 million to $2 million during the quarter, your billings would be:
$1,000,000 + ($2,000,000 - $1,500,000) = $1,500,000
This formula works for most SaaS businesses with traditional subscription models.
Advanced Calculation Considerations
For more complex business models, consider these factors when calculating billings:
1. Multi-year Contracts: Some companies normalize multi-year contracts by including only the annual portion in current billings calculations to avoid lumpy reporting.
2. Usage-based Components: For hybrid pricing models combining subscriptions with usage-based charges, separate tracking for commitment-based billings vs. consumption-based billings provides additional insight.
3. Channel Sales: When selling through partners, distinguish between partner commitments and end-customer commitments to avoid misleading signals.
Key Billings Metrics to Track
Beyond the basic billings calculation, these derivatives provide additional strategic insight:
1. Billings Growth Rate
Track year-over-year and quarter-over-quarter billings growth rates. According to KeyBanc Capital Markets' SaaS Survey, top-quartile SaaS companies maintain billings growth rates of 40%+ even at scale.
2. Net New Billings
Calculate the portion of billings coming from new customers versus existing ones:
Net New Billings = Total Billings - Renewal Billings
This helps distinguish between acquisition and retention success.
3. Billings Retention Rate
Similar to revenue retention rates, this shows what percentage of billings are renewed:
Billings Retention Rate = Renewal Billings / Previous Period's Billings
4. Average Contract Value (ACV) of New Billings
Tracking the average contract value of new billings helps identify upmarket or downmarket movements in your customer acquisition:
ACV of New Billings = Net New Billings / Number of New Contracts
Implementing Billings Tracking in Your Organization
1. Establish a Consistent Methodology
Define and document your billings calculation methodology, ensuring finance, sales, and executive teams share a common understanding.
2. Implement Automated Tracking
Leverage your finance and CRM systems to automate billings calculations, reducing manual effort and potential for error.
3. Incorporate Billings into Regular Reporting
Include billings metrics in leadership dashboards alongside traditional revenue and customer metrics.
4. Use Billings for Forecasting
Develop models that translate billings performance into future revenue expectations, enhancing your forecasting accuracy.
Common Pitfalls to Avoid
1. Confusing Billings with Bookings
Bookings typically represent the total contract value at signing, while billings represent what's actually invoiced in a period. These can differ significantly with multi-year contracts or contracts with deployment phases.
2. Ignoring Contract Length Variations
Comparing billings across periods can be misleading if contract durations vary. Consider normalizing to annual contract value equivalents for clearer comparisons.
3. Over-emphasizing Billings at the Expense of Cash Collection
Strong billings without corresponding collections can mask potential problems. Always consider both metrics together.
4. Focusing Solely on Growth Rates
Absolute billings amounts matter as much as growth rates. A 50% growth on a small base may be less significant than 20% growth on a large base.
Conclusion
Billings provide SaaS executives with a powerful leading indicator of business health and future revenue performance. By properly measuring and analyzing billings metrics, executives can gain earlier insights into business momentum shifts, make more informed investment decisions, and communicate more effectively with investors and boards about the company's trajectory.
As competition in the SaaS space intensifies, the companies with the most sophisticated understanding of their financial metrics—particularly forward-looking indicators like billings—will be best positioned to make strategic decisions that drive sustainable growth and profitability.
Implementing robust billings tracking and analysis isn't merely a financial exercise; it's a strategic imperative that provides the visibility needed to navigate the complex SaaS landscape successfully. For SaaS executives looking to strengthen their competitive position, few initiatives offer more strategic value than mastering the measurement and application of billings metrics.