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.