Yesterday, I met with a bright, young SaaS entrepreneur who asked me to clarify four key numbers for SaaS companies: bookings, monthly recurring revenue, recognized revenue and cash collections. These four numbers are critical to understanding the health of a SaaS startup, and they can be quite different, so it’s important to have a strong grasp on the distinctions between them.
|Monthly Recurring Revenue (MRR)||1,000||1,000||1,000||1,000||1,000||0|
Let’s consider a hypothetical SaaS startup called RedRocket, which sells software for $12k per year, and asks its customers to pay each quarter. On the 15th day of January, one customer agrees to pay RedRocket $12k for a one year contract. The startup doesn’t sell any more software for the next twelve months. The table above demonstrates the differences in bookings, MRR, revenue and cash.
The company books $12,000 in January. Bookings are the amount of money customers have committed to spend with the business. The sum total of future spend is booked in the month a customer signs a contract. Companies with only 12 month contracts can report ACV Bookings (Annual Contract Value); companies with other length contracts, both shorter and longer report TCV Bookings (Total Contract Value). Sometimes startups normalize TCV into an annual number to report ACV.
The company records $1k in MRR (monthly recurring revenue) in January. The MRR is the annualized spend of all customers divided by 12. RedRocket reports MRR at the end of each month. So in a year, assuming the customer doesn’t renew, MRR drops to 0.
The company recognizes $516 in revenue in January, and $1000 in revenue each subsequent month, through the first fifteen days of next January. In January next year, the company recognizes $484 in revenue. Revenue can only be recognized for the days that RedRocket’s software is provided to the customer, in this January’s case, the last 16 days of the month (16 ÷ 31 x 1000 = $516). This amortization of revenue (and expenses) across time periods is called accrual accounting.
The company collects $3k of cash up front from the customer, and then again three more times during the year each quarter. RedRocket’s cash collections should equal the incoming cash from customers into the company’s bank accounts. Cash collections exclude financings.
The recognized revenue, bookings and cash collections numbers appear in a company’s financial statements. The recognized revenue is the revenue line item in a startup’s profit and loss statement. The cash collections is found in the cash flow statements (though it’s a bit hidden. See this overview to calculate it). The size of a company’s total bookings backlog can be found in the deferred income line on the balance sheet, but it doesn’t necessarily correspond to annual bookings numbers (again ACV vs TCV).
These concepts can be challenging at first, but all these numbers are important for startups to review regularly because each describes a different and important facet of the business.
Published 2015-04-23 in financials