.png)
Estd 4.22.2023
For SaaS executives, distinguishing between bookings and revenue is more than an accounting exercise—it's fundamental to accurately forecasting growth, managing investor expectations, and making strategic business decisions. Yet these metrics are frequently confused or used interchangeably, leading to significant business planning errors.
Let's explore how to properly track both, why they differ, and how to leverage each metric for optimal business performance.
Bookings vs Revenue: The Fundamental Distinction
What Are Bookings?
Bookings represent the total value of contracts signed during a specific period. When a customer commits to your service by signing a contract, this is recorded as a booking—regardless of when the cash arrives or when the service begins.
For instance, if a customer signs a 12-month contract worth $120,000 in January, that entire amount is booked in January, even though you may not see all that money until December.
What Is Revenue?
Revenue, on the other hand, is recognized only when the service is actually delivered. Following accounting principles (particularly ASC 606 for US companies), revenue can only be recorded when you fulfill your obligation to the customer.
Using the previous example, that $120,000 contract would typically be recognized as $10,000 in revenue each month over the contract's duration, as the service is delivered.
Why the Difference Matters
According to OpenView Partners' 2023 SaaS Benchmarks Report, companies that accurately track both metrics show 32% better forecast accuracy and make more informed capital allocation decisions than those using blended or imprecise measurements.
The distinction becomes particularly critical in several scenarios:
- Rapid growth phases: When new bookings are accelerating, they serve as a leading indicator of future revenue
- Investor conversations: VCs and public markets value companies based on different metrics at different stages
- Cash flow planning: Large bookings may not translate to immediate cash, creating potential liquidity challenges
How to Track Bookings Effectively
1. Establish Clear Booking Recognition Policies
Create explicit rules for when a deal is considered "booked":
- Is it when the contract is signed?
- When the first payment is received?
- When the service is activated?
Industry best practice, according to Tomasz Tunguz of Redpoint Ventures, is to record bookings upon contract signature, regardless of payment terms.
2. Segment Bookings Appropriately
Break down your bookings by:
- New vs. expansion: Track first-time customers separately from upsells to existing ones
- Contract length: Distinguish between monthly, annual, and multi-year agreements
- Product line: For multi-product companies, track bookings by offering
3. Calculate Annual Contract Value (ACV)
For contracts of varying lengths, normalize to annual values:
- A $36,000 3-year deal would have an ACV of $12,000
- A $1,000/month monthly subscription would have an ACV of $12,000
This normalization makes comparative analysis more meaningful.
How to Track Revenue Correctly
1. Implement Proper Revenue Recognition
Follow established accounting standards for when revenue can be recognized:
- Subscription services: Typically recognized ratably over the service period
- Setup or implementation fees: May be recognized immediately or amortized
- Usage-based components: Recognized as the service is consumed
According to a KPMG study, 67% of SaaS companies still struggle with implementing proper revenue recognition policies for complex contracts.
2. Monitor Deferred Revenue
Deferred revenue represents cash received for services not yet delivered. Track this balance sheet item carefully, as it:
- Represents a future obligation to your customers
- Can be a strong indicator of business health (growing deferred revenue often signals strong future performance)
3. Calculate Monthly Recurring Revenue (MRR)
MRR aggregates all subscription revenue to a monthly equivalent:
- Annual subscriptions contribute 1/12th of their value to MRR
- Multi-year deals are similarly normalized
Bridging the Gap: Key Metrics That Connect Bookings and Revenue
Several metrics help connect bookings to revenue realization:
1. Bookings-to-Revenue Ratio
This ratio helps forecast how bookings will translate into revenue over time. A typical SaaS company might see ratios like:
- Quarter 1: 20-30% of bookings convert to revenue
- Year 1: 70-80% of bookings convert to revenue
2. Sales Efficiency Metrics
Calculate how efficiently your sales investments generate revenue with metrics like:
- CAC Payback Period: Months required for a customer's revenue to cover their acquisition cost
- Magic Number: Quarterly revenue growth divided by sales and marketing spend
According to Bessemer Venture Partners, elite SaaS companies maintain a Magic Number above 1.0, meaning they generate more than $1 in ARR for every $1 spent on sales and marketing.
Implementation: A Practical Approach
Technology Infrastructure
Implement systems that can properly track both metrics:
- CRM system: For booking capture at contract signature
- Billing system: For tracking payment schedules and collection
- Accounting software: For proper revenue recognition
- Business intelligence tools: For integrated reporting across systems
Reporting Cadence
Develop standardized reports that show both metrics:
- Weekly: Bookings pipeline and closing forecasts
- Monthly: Bookings achieved vs. targets, revenue recognized
- Quarterly: Comprehensive analysis of bookings-to-revenue conversion rates
Common Pitfalls to Avoid
- Mixing metrics in forecasts: Don't predict revenue using booking growth rates without conversion modeling
- Incentivizing only bookings: This can lead to poor-quality contracts that never translate to revenue
- Ignoring timing differences: Large quarterly bookings spikes won't immediately affect revenue
- Under-investing in systems: Poor tracking infrastructure leads to manual reconciliation and errors
Conclusion: Leveraging Both Metrics for Strategic Advantage
The most successful SaaS companies don't simply track bookings and revenue—they use the relationship between these metrics to drive strategy.
Understanding this connection allows executives to:
- Predict cash flow needs during growth phases
- Identify early warnings when booking quality deteriorates
- Make informed decisions about scaling sales teams based on revenue conversion efficiency
- Communicate appropriate metrics to different stakeholders (boards, investors, employees)
By implementing robust tracking for both bookings and revenue, SaaS executives gain the financial clarity needed to scale efficiently while avoiding the cash flow crises that have ended many promising software companies.
The discipline to distinguish and properly analyze these metrics separates the most financially sustainable SaaS businesses from those that grow quickly but struggle to convert that growth into lasting value.