You just closed a deal. The client signed the contract. Everyone on the sales team is celebrating. You might be tempted to look at your bank account or your accounting software to see the impact. However, nothing has changed there yet.
That signed piece of paper is a booking.
It is easy to conflate sales activity with financial reality, especially in the early days of a startup when cash flow is tight. Understanding the specific definition of a booking helps you plan for the future without lying to yourself about your current resources.
Defining the Term
#A booking is a committed contract between a company and a customer. It is a legal obligation where the customer has promised to pay you a specific amount of money in exchange for goods or services.
The defining characteristic of a booking is the commitment. It is not a verbal ‘yes’ or a warm lead. It is a signed document.
However, the service usually has not been delivered yet. Because the service has not been delivered, the money has not been earned in the eyes of an accountant. It sits in a unique state where you have won the business, but you have not yet fulfilled your side of the bargain.
Bookings vs. Revenue
#The most common mistake founders make is confusing bookings with revenue. These are two very different things.
Revenue is recognized only when the service is provided. This is a core accounting principle. If you sign a customer for a $12,000 annual contract to use your software, you have a $12,000 booking the moment the ink dries.
But you do not have $12,000 in revenue yet.
If that contract starts on January 1st, you earn revenue as you deliver the service. In January, you recognize $1,000. In February, you recognize another $1,000. You will not recognize the full value of that contract until the year is over.
Confusing these two leads to inflated financial statements and poor cash management.
Why Track Bookings?
#If bookings are not revenue, you might ask why you should track them at all. Bookings are actually the best forward-looking indicator of your business health.
While revenue looks at the past or present delivery of value, bookings look at the future.
High bookings numbers tell you several things:
- Your product has market fit.
- Your sales team is effective.
- You need to prepare resources to deliver the work.
If you see a spike in bookings, you know you might need to hire more customer support staff or increase server capacity in the coming months. If revenue is steady but bookings drop to zero, you know you are going to have a cash flow crisis in the future even if things look fine today.
Risks and Unknowns
#There is always a risk that a booking does not turn into cash. A client could break a contract. A project could get cancelled before it starts.
When looking at your booking metrics, you have to ask yourself how solid the contracts are. Are there opt-out clauses? Is the customer stable?
A booking is a promise. It is up to you to execute on that promise to turn it into real value.