What are calculated billings?

Calculated billings are a financial measure that subscription-based businesses use to see how well they did with sales in a specific time frame. This measure shows how much money the company might make in the future. To find it, add the total amount of revenue recorded in a given period to the change in the deferred revenue that occurred during that period. Calculated billings record the sales made to both new and old buyers.

Synonym

• Revenue projections

How to Use Calculated Billings to Guess Future Performance

Calculated billings are vital to estimating a company’s income and determining its financial future. This metric gives valuable information about a company’s health and growth prospects.

What Calculated Billings Do

Calculated billings are an excellent way to guess how much money the business will make and how big it will get. Businesses can guess how much money they will make by looking at the patterns in their estimated billings and changing their strategies as needed. A steady rise in calculated billings indicates a bright future, showing strong sales and customer growth. On the other hand, a drop could mean that the company is about to face problems, such as more competition, a saturated market, or less desire for its products.

Things that affect how billings are calculated

Many internal and external things affect calculated billings; they don’t just happen.

• Length of the Contract: A customer’s contract can significantly affect how much they are billed. It is common for more extended contracts to mean more deferred income, making the numbers used to figure out billings higher. On the other hand, shorter contracts mean less deferred income, which could mean lower calculated billings.
• Take Dropbox as an example of a SaaS company. If they offer a deal on a two-year subscription plan, they may see a rise in billable hours at first because so many people will be committing to a long-term. However, a promotion focusing on a three-month trial might affect deferred income differently.
• Seasonality: Sales at many businesses change with the seasons. For example, during the Christmas shopping season, a SaaS company that provides retail solutions might see a rise in planned billings. It’s essential to see and account for these seasonal patterns for effective forecasting. For example, Adobe, known for its artistic software suite, might see higher calculated billings when students and teachers buy software tools for school. In the same way, tax software companies may see a rise in sales as the deadline for paying taxes gets closer.

• Conditions of the Economy: The state of the economy as a whole can have a significant impact on how much someone is billed. When the economy is growing, companies may see longer contract terms and more demand, which can affect how much they charge. When the economy is terrible, on the other hand, customers might sign shorter contracts and spend less, which could affect estimated billings. For example, when the economy was terrible in 2008, many companies cut back on spending and chose shorter software contract terms or lower-level packages. Many SaaS companies would have seen their calculated billings decrease because of this behavior.

• How Customers Act: Customers change along with companies. Changing a customer’s wants, needs, or habits can affect how much they are billed. For example, if subscription packages become more customized and flexible, it could change how bills are calculated generally. As the number of people working from home grows, especially after 2020, companies like Zoom or Slack may have noticed that customers are more interested in premium or enterprise packages, which can handle bigger teams and have more features. This change would affect how they estimated their bills.

• Competitive Landscape: The number of competitors and how they plan to do business can also change how billings are calculated. If a competitor gives significant discounts or adds a new feature that changes the game, it could affect a business’s sales and, by extension, how much it charges for its services. For instance, if Microsoft offers a significant discount on its Microsoft 365 suite or adds a cool new feature, rivals like Google Workspace may temporarily see a drop in new subscriptions or renewals, which could change how much they bill.

Businesses can better plan for changes in estimated billings and make changes to their strategies if they understand these factors and how they affect them in the real world.

Process of Calculating Billings

The estimated billing process is a complicated path that shows how financially stable a company is and how much money it could make in the future.

From the contract to recognizing revenue

• Starting a contract: The trip starts when a customer signs a contract to commit to a service or subscription. This contract spells out the rules, how long it will last, and how payments will be made.
• Revenue Recognition: The company starts to record revenue when services or goods are provided. This payment is spread out over the contract’s life, ensuring that the money made fits the value given to the customer.
• Deferred Revenue: Not all of a contract’s income is immediately recognized. Deferred revenue is the part of the contract’s value related to services or goods that have not yet been provided. This amount is on the company’s balance sheet and is slowly counted as income over time.

Problems and Things to Think About

• Pre-billed Subscription Lengths: Some customers pay ahead of time for extended periods, usually in exchange for savings or extra benefits. This immediately gives the company cash flow, but it also means that a big chunk of the contract’s value will be counted as income in later periods.
• Co-terming of Subscription Agreements: For the same user, a business may align the end dates of multiple subscription agreements. This co-terming can lead to different contract lengths, which can change when and how much income is recognized.
• Upgrades and renewals: When a customer upgrades or renews their contract, calculating their bill must consider these changes. Renewals may extend the time of deferred revenue, while upgrades can result in immediate revenue recognition if they include more services or products that can be used immediately.
• Coupons and Cash Back: Discounts can affect deferred income, especially if they are given for long-term contracts. Cancellations or refunds of contracts can add more complications, necessitating changes to both recognized and deferred income.

What Makes Bookings, Billings, and Revenue Different

In the complicated world of SaaS billing, knowing the differences between bookings, billings, and revenue is essential to doing correct financial analysis and reporting.

Making reservations

• Type of Commitment: Bookings become legally binding contracts that offer money in the future. It’s a promise from the customer to buy something or pay for a service in the future.
• Time: A reservation is made when a contract is signed, even if the service hasn’t been provided or payment hasn’t been made. It’s a measure that looks ahead and is often used to determine how much cash might flow.
• Effects on Financial Statements: Bookings are an excellent way to see how much money you might make in the future, but they don’t appear on the income statement. Instead, they could be kept track of directly or included in quarterly reports to give more information about how sales are going.

Putting together bills

• Composition: Billings include the actual income recognized during a period and the change in the amount of deferred revenue. It gives a fuller picture of sales actions than just revenue.
• Paid: In Advance: Not all of the value of a contract is instantly recognized as revenue because services or goods are provided over time. The part that hasn’t been recognized yet is added to delayed revenue, which, along with recognized revenue, gives the total billings.
• Billings: For businesses with long-term contracts or subscription plans, billings can be an essential metric that helps them see how sales are going and how committed their customers are.

Cash Flow

• Revenue: This is the most essential part of the income sheet. It shows how much money was made from selling things or providing services during a specific period. Revenue, on the other hand, is realized and recognized, which shows actual earnings.
• Criteria: Certain rules must be followed for revenue recognition to ensure that earnings are only recorded when the product or service has been given or rendered and payment is expected.
• Importance: For investors, creditors, and analysts, among others, revenue is a crucial measure. It’s one of the best ways to tell how well a business runs and it is used in many financial measures and analyses.

Reporting on reservations, payments, and income

Accurately reporting bookings, bills, and income is vital to finance operations to keep things open and build trust.

Why accurate reporting is important

• Trust among Stakeholders: Stakeholders trust accurate financial reporting more. Investors, analysts, and other interested parties have more faith in a company’s management and future chances when they know they can trust its financial statements.
• Following the rules: Reporting finances isn’t just the right thing to do; it’s required by law. Making mistakes can cost them money, get them in trouble with the law, and hurt their company’s image.
• Operational Insights: Accurate reporting gives companies helpful information about their operations, which helps them figure out what they’re doing well and could do better.

Mistakes People Make

When a deal is recorded more than once, this is called double counting. For example, if a reservation is mistakenly counted as income, it can make the numbers look better than they are.

• Misclassification: Financial statements can be wrong if a deal is in the wrong category. One example is that calling a long-term debt a short-term debt can mess up a company’s cash flow.
• Not Taking Discounts or Refunds into Account: If you don’t count discounts or refunds given to customers, your income numbers will be higher than they are.
• Inconsistent Revenue Recognition: Recognizing revenue too early or too late can give a false picture of a company’s financial health during a specific time. This is especially important for businesses with long-term contracts.
• Overlooking Deferred Revenue: Ignoring Deferred Revenue If a company with a subscription business plan doesn’t consider deferred revenue, it can mess up its revenue and billing numbers.

Tips for Writing Correct Reports

• Regular Audits: Regular internal and external audits can help find and fix problems with financial reporting.
• Training and Development: Many common mistakes can be avoided by ensuring the finance team is well-trained and up-to-date on the latest accounting rules and methods.
• Robust accounting systems: Buying advanced accounting tools that can do a lot of the work for you can cut down on mistakes made by hand.

What role does billing software play in writing up calculated bills?

Billing software automatically figures out bills by keeping track of income and changes in delayed income over a specific period to show sales to new paying customers, renewals, and extra sales to existing paying customers. Billing tools usually do this calculation in this way:

• Rules for Recognizing Revenue: Many billing software come with rules for when and how to record income. Most of the time, these rules come from accounting standards like IFRS 15 or ASC 606.
• Billing Events and Transactions: During a specific period, billing software keeps track of all billing events and transactions. This includes sending out invoices, keeping track of payments, and reporting any changes to deferred income.
• Deferred Revenue: The software keeps track of deferred revenue, which customers owe for things or services that haven’t been delivered yet. Deferred revenue is a liability on the balance sheet until the income that goes with it is recognized.
• Revenue Recognized: A billing tool records revenue when it meets the standards set by accounting authorities for revenue recognition. Most of the time, this happens when goods or services are provided, or performance obligations are met.
• Figuring Out Calculated Billings: For a specific, the software figures out calculated billings by looking at: • New Sales to New Customers: It finds sales made to brand-new customers during that period. Because these sales bring in new money, they are counted toward billings.
• Renewals: During this time, the software finds contracts or subscriptions that are being renewed. When you renew an agreement, you usually have to account for deferred revenue and book new revenue for the new time.
• Extra Sales to Current Customers: Any extra sales made to current customers are added to the bills sent out. These could include recording new revenue for the extra services or goods sold and recognizing revenue that should be paid later.
• Number of Days Deferred: The billing software figures out how many daysnumbereferred over the time. Use of this change, previously deferred revenue will be recognized, and any new delayed revenue from sales or renewals will be accounted for.
• Adding It All Up: The software adds up the revenue recorded during the period and the change in deferred revenue to get the total amount of billings for the period. This shows the number of new paying customers, repeats, and extra sales to paying customers who had already bought from you during that time.
• Reporting: Most billing software has reporting tools showing calculated invoices for various periods. This lets companies keep track of their progress in terms of new sales and recurring income.

It’s not just a matter of money to understand estimated billings; it’s also a matter of strategy, especially for businesses that depend on subscriptions. With changing customer tastes and changes in the economy, the business world is constantly changing. Knowing how to figure billings and other metrics becomes very important as these things happen. It shows how a company is doing financially right now and how it could grow in the future. Businesses can make intelligent choices that will help them grow and succeed in a market that is always getting more competitive by constantly tracking and analyzing their revenue metrics.