Bookings, Billings, Revenue, PipelineChris Schwalbach · November 16, 2016 · 3.3 min
Pipeline, bookings, revenue, and billings – they’re key to business performance regardless of industry. But the relationship between them can be difficult to understand, even for experienced CEOs and entrepreneurs. They’re all tied together, and looking at one without understanding how the others move gives an incomplete picture of the business. Good CEOs can’t make that mistake.
Let’s define them first:
Pipeline: Probability weighted view of sales based on expected size of deal and it’s potential to close.
Bookings: A booking occurs when a sale is made and the customer is committed to the purchase (ideally when a contract or purchase order is signed by the customer).
Revenue: The amount of the contracted sale earned – represented by the products that have actually been delivered or the services that have actually been performed in a given period of time.
Billings: Invoices sent and cash to be collected.
While all these things are important to businesses across all industries, they may look or feel a little different depending on certain factors. Let’s take a SaaS (software as a service) company as our first example. Many SaaS pipelines are made up of ongoing subscriptions. For example, a company signs up for a six month, fixed-rate service subscription. Even if you receive an up-front payment for the whole six-month subscription, you’ll have deferred revenue on the books as a liability since you’re still on the hook for delivering the work. Remember – this only becomes revenue when it is “earned”, i.e., the work is performed (see figure 1).
Let’s consider a consulting company now. Winning a contract adds to bookings, i.e. a “sale” has been made and the customer is committed, but just like our SaaS company this cannot be recorded as revenue until the work is performed. And you will not get paid at all until you initiate your billings, i.e. you actually invoice for the work performed. Another thing to consider in project consulting is that payments are generally tied to milestones, or revenue to cost. So, if you spend 50% of your projected costs (or perform 50% of the work) on the consulting project, you can recognize 50% of your projected revenue on the books.
One of the major things to consider when wrapping your head around your company’s pipeline, bookings, revenue, and billings is the cadence of the business; how often you do work and how often you’re paid for it. A good business leader will look forward, forecasting revenue based on an accurate pipeline and booking schedule. Businesses must also understand the ratios at each step of the way, i.e., how your measure of sales probability actually shakes out to reality (pipeline to bookings), how your fulfillment schedule works with your customer commitments (bookings to revenue), and how—and at what proportion—your revenue becomes cash.
Of course, a good leader will look backwards as well and ask themselves this question: using these ratios, what does our pipeline need to be now to hit our revenue and cash projections later? Understanding this question is absolutely critical to managing and understanding cash flow. Only once this is known can one establish proper commission rates for sales people and build realistic quotas. Accurate pricing also depends on an understanding of the above principles, questions and ratios; questions like “what kind of discounts can we afford to get pre-paid” can only be answered after you’ve figured out your biggest performance indicators.
You – the savvy, motivated CEO or small business owner – are not the only person that needs to understand these things. Any investor or acquirer will want a firm handle on where a company’s pipeline, bookings, or revenue stand at a given point in time. Make sure you have these KPI’s at your fingertips at all times, for the sake of your business and its perceived value to an investor!
By Jim Nollsch
AVL Growth Partners, 2016