A single three-year contract shows up as four different numbers depending on which one you report. Founders who mix them up in a deck invite a hard conversation in diligence. Here is what each one means and how they connect.
Definitions
| Metric | What it measures | When it moves |
|---|---|---|
| Bookings | Total contract value signed (or first-year value, if you define it that way) | At signature |
| Billings | Amounts invoiced to customers | When you invoice |
| Revenue | Value of service delivered, under ASC 606 | As the service is provided |
| ARR | Annualized value of recurring subscriptions in effect | When the subscription starts or changes |
One contract, four numbers
A customer signs on January 15 for a three-year subscription at $100,000 a year, starting February 1, billed annually in advance.
| January | February | Year 1 total | |
|---|---|---|---|
| Bookings (total contract value) | $300,000 | $0 | $300,000 |
| Billings | $0 | $100,000 | $100,000 |
| Revenue | $0 | about $8,333 | about $91,667 (Feb to Dec) |
| ARR | $0 | $100,000 | $100,000 |
Each number is correct; each answers a different question.
Reconciling them
- Billings = revenue + change in deferred revenue (adjusted for unbilled receivables and contract assets where you invoice in arrears).
- Remaining performance obligations = bookings not yet recognized as revenue: the deferred revenue balance plus contracted amounts not yet billed.
- ARR should be explainable against monthly subscription revenue times twelve, allowing for mid-month starts and ramps.
Which number for which audience
- Sales performance: bookings, ideally first-year or annualized contract value so multi-year deals are comparable.
- Cash planning: billings and collections.
- Financial statements, lenders, auditors: revenue.
- Growth and valuation: ARR and net new ARR.
Common mistakes
- Reporting total contract value of multi-year deals as if it were annual growth.
- Calling billings "revenue" in investor updates during a heavy renewal quarter.
- Starting ARR at signature instead of service start.
- Letting the definitions change between quarters.
Where each number lives
- Bookings: the CRM, from closed-won opportunities, checked against signed order forms.
- Billings: the billing system or the invoice register in the ledger.
- Revenue: the general ledger, after the revenue schedule is posted for the month.
- ARR: the subscription records in the billing system, rolled into the ARR bridge.
When two systems disagree, the signed contract decides. A monthly tie-out between the CRM, billing and the ledger catches deals entered with the wrong start date, term or price before they reach a board deck.
We define each metric once, calculate all four from the billing and accounting systems every month, and include the reconciliation in the finance pack, so a reader can move from one to another without guessing.
Sources
- SEC, Commission Guidance on Management's Discussion and Analysis (key performance indicators and metrics), Release 33-10751 (PDF)
- FASB Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers
Questions founders ask
Which of these is GAAP?
Only revenue. Bookings, billings and ARR are operating metrics. Billings can be derived from GAAP numbers: revenue plus the change in deferred revenue (and minus the change in unbilled receivables).
Should the board see bookings?
Yes, as a leading indicator of sales performance, but next to ARR and revenue so a large multi-year booking is not mistaken for growth in a single year.
