Bookings, cash and revenue

Frequently I find myself explaining accounting concepts to non-accountants.  It’s actually a part of what I do that I enjoy; I’ve taught courses as an adjunct in the past and the teaching was the fun part.  The rest of being an adjunct… well, the less said about that, the better.
One construct that seems to come up a lot, and can be confusing if you don’t spend all day thinking about this stuff like I do, is bookings vs revenue vs billings vs cash.
Bookings are closed orders.  Take the example of a subscription software business that sells a $10 per month service.  If you sell a 1 year subscription, that’s a $120 booking.  2 years, $240, and so on.  It is not revenue.
Revenue on this deal is $10 per month, recognized monthly, starting when the software was turned on for the customer.  Not when the deal is signed – when the service is turned on.  Similar concept in businesses that ship physical products.
This is different from cash.  You might get paid up front, in arrears, as you go, or 50/50 up front and at the end.  But when you collect the cash has no impact on revenue.  If you never collect the cash, this is bad debt expense (although if this happens a lot, you might need to adjust revenue).
I won’t get into the accounting debits and credits for all of these, but they can get complex quickly.  Imagine you have a subscription where the fee is $10 per month but you give away the first month for free.  The booking is $110, and the revenue is $9.17 per month over all 12 months.  From a revenue perspective, it’s the same as an 8.3333% discount.  Again, when you collect the cash for this is irrelevant.
This comes up a lot in membership based businesses where the first month can be free.  If there’s no term for the membership, then the revenue is just zero.  If there is a term, you recognize revenue ratably over the period.
The inverse of this is also true – if you sign a real estate lease with a rent-free period, your rent during the rent-free period isn’t zero.  For a 10 year lease with rent of $10 per month (just making the numbers easy), if you get the first six months free, your monthly rent expense is actually 10 * 114/120 = $9.50. The part you didn’t pay in cash for those 6 months gets carried on the balance sheet as an accrued liability. If you pay your rent late – which I don’t recommend – that doesn’t affect that rent is still an expense.  The total value of that lease is $1140 – it’s sort of the opposite of a booking from the company’s perspective.
Depending on your team, you too might find yourself explaining this frequently.  I have found certain board members in particular struggle to keep this straight.  It is the CFO’s job to make sure terms are clear and consistent, and as always, surprises are at a minimum.

Re-trading the job offer

In many of the companies I work with, I sign candidate offer letters.  This isn’t always something a CFO does, but if possible, I prefer that I (or the CEO) am the final check on this particular business process.  One obvious reason is that I know what’s in the budget for a given position.  One less obvious one is someone with a touch of OCD will find errors – incorrect years, language from an old template that doesn’t belong in this particular letter – that someone else might not.
Another reason is that recently for somewhat junior positions, I am seeing a lot of negotiating by candidates who have received a verbal offer, accepted it, and now wants to re-trade.  It’s hard for a hiring manager to resist this.  With rare exceptions, I always do.
A candidate who has accepted verbally a salary of $100, but then when they get the letter and ask for $105, is setting him or herself up for failure.  He’s now signaled that either (a) everything is going to be a negotiation, (b) I can’t necessarily trust him to keep commitments or (c) my offer is the stalking horse for another one.  In my experience, most often it is (c), but (a) and (b) do also come into play.
I have sales managers tell me that this is just someone who is valuable in the market negotiating hard for themselves.  I don’t see it that way.  Maybe I am biased because credibility is my only product.  In my view, once the parties agree, a negotiation is done.  If someone really is a superstar, we’re going to find that out and likely make an adjustment upward anyway.  Or if they have variable comp, they’re going to crush their numbers anyway so the base salary doesn’t really matter.  Needless to say, it’s nearly impossible to adjust down.
Because I work with build stage companies, the hiring managers often are young and haven’t had the scars yet of candidates re-trading their job offers because what they really want is more money to stay where they are. My advice is to resist.