How to Calculate Bookings
Welcome to our latest post in our MVM (Most-Valuable-Metric) series, last time we filled you in on Lead Velocity Rate. Today we want to drop some knowledge on bookings. Specifically we want to fill you in on why bookings are great, how to calculate bookings and how they differ from other similar metrics.
When we first started Visible, a good amount of SaaS CEOs told me about bookings and why they are the primary metric for their company. This was the first I heard of bookings so I looked into it. What I quickly realized is that bookings are a forward looking metric that previewed revenue to come and give a great look into the health of the business.
Now that I figured out why bookings were so important, I had to figure out how to calculate and learn a little more.
The first thing I learned is that bookings are not a GAAP defined term so the definition may vary depending on the company. However, our goal is to create the standard of bookings for early stage startups to use going froward. Here it goes:
Bookings are the value of all transactions in a specified period of time normalized for one year. Fred Wilson breaks it down very simply on his AVC blog, “When a customer commits to spend money, that is a booking”.
This includes subscription revenue, non-subscription revenue, professional services, etc. Lets break this down and visualize an example. Lets say for January 2015 you want to calculate bookings and you have the following transactions:
- 24 month contract @ $1,000 per month (paid bi-annually)
- 12 month contract @ $2,000 per month (paid upfront)
- $5,000 one time setup fee (paid upfront)
- $3,000 professional services (paid upfront)
- 6 month contract renewal @ $500 per month (paid quarterly)
- Upsell on 1 month to month contract with new price @ $1,000 per month.
Jan 2015 Bookings = $48,000 (You’ll see we didn’t include the 2nd part of the first contract for this calculation). How does this differ from Revenue, MRR or Collections?
Revenue is only recognized when a particular service is used. If you have professional services and/or a setup fee included as part of a software contract then the revenue is ratably recognized over the lifetime value of the customer (lets assume 1 year). So looking at the same set of transaction you’ll have revenue of $5,166.
MRR only applies to the subscription part (aka recurring) part of the business so the MRR will be $4,500 in our example.
Collections happen when the customer actually pays you and the cash is in the bank. Going along with the example above collections in January will be $40,500.
It’s important to track all of these metrics in parallel for your business and how they work together. You want to make sure you have future and predicable cash flows coming in (Bookings & MRR) but also making sure you are getting paid (Collections) and that you can recognize it (Revenue).