Bookings vs Revenue vs Collections
August 27, 2010
Fred Wilson had a fantastic blog post a few weeks ago discussing Bookings vs Revenue vs Collections. As a Boston-based venture capital firm that focuses on expansion stage technology companies (primarily in the SaaS space), we encounter a great deal of confusion in this area as we speak with prospect CEOs, as well as our newer portfolio companies.
It’s important to understand the difference between these items, and it’s just as important to track these items regularly. If you’re looking for investors, you’ll definitely want to make sure that you can provide this data for your company, and that you can explain the trends within the data.
Bookings are not a GAAP defined term, and thus, the definition might vary by company. Typically, bookings correspond to the value of a contract signed during a certain period. Where this gets tricky is making sure that whatever data you are reporting for bookings is apples to apples. It’s not a good idea, and it is also very misleading, to combine the value of a 12-month contract with a 24 month contract booked in the same period and report the sum of the two contracts as your company’s bookings for that period. Even if you have booked a multi-year deal, the amount that your company reports for bookings in that period should typically be limited to the value of the first 12 months of the contract. When you’re presenting bookings numbers to a VC, be prepared to explain exactly what your company’s bookings policy is.
Revenue is a GAAP defined term, although many startup companies might not be reporting revenues 100% correctly. In the most simplistic sense, revenue happens when a service or product is actually delivered. For most SaaS companies, revenue is recognized ratably over the life of the subscription. As I mentioned, many startup companies may not yet know whether the revenue they are reporting is correct under GAAP…what is important is to understand how you’re reporting revenue, be able to articulate how you’re reporting revenue, and show that you’ve consistently followed this methodology for the periods that you are presenting to a VC.
Collections are simply when you receive cash from your customers. This may or may not correspond to when you’ve recorded a booking or when you’ve recorded revenue.
A fourth item which often causes confusion is Billings. Billings are simply the amounts that you’ve invoiced your customers. They may or may not correspond to bookings (in the case where you’ve booked a 12 month contract but are billing the customer monthly), and they may not correspond to revenues (when you’ve billed a customer up-front, but will be delivering the product or service in the future). Your company’s billings amounts within a certain month might not be for consistent time-periods. For instance, you might bill 1 customer for 12 months up-front, and another customer for 3 months up-front. This doesn’t mean that the amount you calculate for billings is incorrect…but it does mean that if a VC asks for your billings data that you should really make sure that you provide specifics about what exactly is being billed. The VC might be running analysis on the data unbeknownst to you, and the outcome could be radically different depending upon the assumptions they’ve made around the periods billed within the dataset.
Hopefully these tips are helpful whether you’re seeking expansion capital or growth capital, or if you’re just trying to understand the complexities of your companies’ revenue cycle.
Please check out Fred Wilson’s post on this topic as well. I highly recommend it!