David Cummings on Startups

Understanding Bookings as Different From Revenue

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David Cummings

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One of the financial questions investors are fond of asking, and entrepreneurs often struggle with, is that of bookings. Bookings are related to revenue but are at the front-end, before cash comes in. Bookings are best thought of as the amount of money committed to be paid to the company in the future, where the time frame can be any amount of time.

Let’s look at a few examples:

  • A customer signs up for a one-year contract with $50,000 up front and $50,000 over the next twelve months but hasn’t paid anything yet — that’s $100,000 in bookings with no cash received and revenue to be recognized on a monthly basis as the solution is delivered
  • A customer signs up for a two-year contract paying $2,000 per month with no up-front fees, making for $48,000 of bookings (the total contract value over the life of the arrangement)
  • A customer is signs up paying $1,000 month with no contract and just pre-paid their first month, resulting in no change to bookings

Recurring revenue is the most important startup metric as it shows how much revenue the business will generate assuming no churn and no upgrades. Recurring revenue doesn’t take into account how much of the revenue is contractually obligated, whereas bookings is driven by contractually obligated revenue.

So, when an investor asks a question like “how much do you have in bookings”, be ready to answer it, especially for a specific timeframe (e.g. we have $500,000 booked for the next 12 months based on signed contracts).

What else? What are some other thoughts on bookings and how it relates to revenue?

Comments

2 responses to “Understanding Bookings as Different From Revenue”

  1. Daniel Roberts Avatar
    Daniel Roberts

    Wow. I feel dumb, but thank you so much! As our MRR grows I never knew how to talk about this. So helpful.

    Reply
  2. Brad Dixon (@rbdixon) Avatar
    Brad Dixon (@rbdixon)

    If your startup is likely to be acquired by a known set of companies it would be advisable to understand the revenue recognition practices of those companies. Revenue recognition rules define when dollars move from booking to revenue. Many startups run under cash accounting rules which move a dollar to revenue once it arrives in the bank account. The risk is that if a startup’s product (and contracts!) are structured such that the acquiring company can’t recognize revenue up-front or on a pro-rated basis the most conservative approach is to _wait_ until the contract is fully complete to recognize the revenue. This can completely distort the financial basis of the acquisition and potentially any earn-outs if they are based on revenue and not bookings.

    For SaaS revenue recognition may be very simple since 1/12’th of the yearly contract can be recognized each month. A key practice is to make sure you have a gate that every new customer passes through which generates evidence that the product is delivered. This could be as simple as BCC’ing their “Welcome” email to a special address that simply archives the email. Sure, you’ve got that info in the database but when the acquiring company wants to see your evidence its better to show them something simple and obvious.

    Installed software offerings and products with a mixed services & product component are a special hazard. Your SaaS product, if acquired by a company with conservative revenue recognition practices, could become a back-end recognized product! This would mean the bucks from a 1-year contract wouldn’t “recognize” until the end of month 12 or the end of the services component. Boo. I’ve been told that there are tactics to manage this situation but the lessons I’ve learned from experts are that a) maintain consistent pricing on services across customer, b) keep records of what you did and what you charged for each services gig, and c) try to standardize these services with a clear definition. The goal is to try and make it clear that X% of every deal is services and have evidence to back that up.

    I’m just a technical software product manager who has beat my head against this rock before. Consult a real revenue recognition expert because the rules are complex and it is all about risk perception. Lastly… for a founder none of this matters if you don’t have a product with bookings so job #1 is getting that great product/market fit and winning customers!

    http://www.linkedin.com/in/bdixon

    Reply

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