Bookings, billings and revenue in a subscription business
How a booking, an invoice and recognised revenue differ for a SaaS company, why investors ask for all three, and how to read each from the books.
By Achekam · · 5 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
In March, a Nairobi software company signs a two-year contract with a logistics group. The customer agrees to pay a year in advance, the invoice goes out the same week, and the money arrives in April. The founder is delighted, and then confused when the board pack shows only a small slice of that money as revenue for the quarter.
Nothing has gone wrong. The contract, the invoice and the revenue are three different things that happen at different times, and a subscription business needs to track all three. Investors ask for each because together they show where the business is heading, what cash is coming, and what has genuinely been earned. This article untangles them.
The booking: a contract that obliges the customer to pay
Andreessen Horowitz explains that bookings are the value of a contract obliging a customer to pay. It is equally clear about what is not a booking: letters of intent and verbal agreements are neither revenue nor bookings.
In the opening example, the booking is the full value of the two-year contract, recorded when the order form is signed in March. Bookings are a measure of sales success. They tell an investor how much new business the sales team brought in, even though none of it has been invoiced or earned yet.
Bookings do not appear in the ledger. They come from your signed contracts, so keep a simple register of each signed order form: customer, start date, term and total contract value.
The billing: the invoice issued
Billings are what the business has invoiced. In Achekam, a business creates customer invoices as drafts it can change or delete. Issuing one takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. So the moment the March invoice for the first year is issued, the debtor and the sale are in the books.
That is the point where care is needed. The invoice has posted the full first-year amount as sales, but the company has delivered almost none of the service yet.
The revenue: earned as the service is delivered
Andreessen Horowitz explains that revenue is recognised when the service is provided, or ratably over the subscription. It also explains how the gap is held: in a SaaS business, cash collected in advance is recorded as deferred revenue, a liability. For a 24-month deal, deferred revenue drops by 1/24th and revenue rises by 1/24th each month as the service is delivered.
Investopedia defines deferred revenue, also called unearned revenue, as a payment received in advance for products or services not yet delivered, shown as a liability on the balance sheet until the obligations are fulfilled. It notes that both ASC 606 and IFRS 15 require upfront payments to be recorded as contract liabilities that turn into revenue as the company completes its obligations. ACCA quotes IFRS 15's definition of a contract liability: an entity's obligation to transfer goods or services to a customer for which it has received consideration, or the amount is due, from the customer.
In short:
| Measure | When it happens | Where it shows |
|---|---|---|
| Booking | The order form is signed | Your contract register |
| Billing | The invoice is issued | Invoices issued in the period |
| Revenue | The service is delivered, month by month | The income statement |
| Deferred revenue | Billed or paid, not yet earned | The balance sheet, as a liability |
Why upfront invoices flatter a period
Investopedia notes that without deferring revenue, a company might overstate its profits in periods of high upfront payments. A SaaS business that bills most of its customers annually in January, and leaves those invoices sitting in sales, will show a spectacular first quarter and nine thin months. Neither picture is true.
That is why investors look at all three numbers together:
- Bookings show sales momentum.
- Billings show the cash that should arrive.
- Revenue shows what was actually earned, and is the figure profit is built on.
A company with rising bookings but flat revenue may simply have signed contracts that start later. A company with high billings and low revenue may be collecting a lot of annual prepayments. Each combination tells a story, and Andreessen Horowitz's guide to 16 startup metrics explains bookings versus revenue alongside the other figures investors look at.
Producing all three from the books
The ledger gives you billings directly. To make it give you revenue as well, the upfront part of each invoice has to be moved out of sales into a deferred revenue liability, and released month by month.
A business can post manual journals for this; an unbalanced journal or one dated in a closed month is refused, and a posted journal is corrected only by a reversal. In words, for the opening example:
- When the first-year invoice is issued in March, post a journal moving the first-year amount, excluding VAT, from sales to a deferred revenue account.
- At the end of each month of service, post a journal moving one month's share from deferred revenue back to sales.
- Keep a schedule of every annual invoice, its start date and the monthly amount, so each month's release can be checked.
The detailed routine is covered in deferring annual invoices by journal.
Management accounts then do the rest. They show an income statement for a chosen period beside the period before, and a balance sheet at period end, both added up from the business's own journals and exportable as PDF or CSV. The income statement shows revenue earned; the balance sheet shows the deferred revenue still to be earned. One caution: the year-to-date preset starts on 1 January, not on the business's own year start, so choose the period by hand if your financial year begins in another month.
Put together, an investor pack can show bookings from the contract register, billings from the invoices issued, revenue from the income statement and the deferred revenue balance from the balance sheet. What to include each month is covered in monthly reporting to investors.
Start the contract register this week, with every signed order form from the current financial year, and agree with your accountant which invoices need deferring before the month is closed.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
