Learn how to calculate billings, an important metric for any SaaS business
For SaaS (software-as-a-service) businesses, one important metric to measure is the billings. As the subscription modes of your users vary from monthly renewals to annual renewals, the billings can capture the potential revenue you expect to receive for the current month. In this article, you will learn what the billings metric is and how it is calculated, why you should calculate it, how you should analyze it, and how you can improve your billings.
What is the billings metric?
Billings refer to the expected revenue from your users that is reflected in the invoices you send them. This means that most of the billings are for the month that is in the date of the invoice, often the current month. However, this can include other months in the future. For example, when the subscription is paid annually, the billings encompass the current month and the succeeding eleven months.
To calculate the billings for a given month, simply get the sum of the billings listed for the current month.
We can imagine the billings metric as the next step from bookings metric. If the bookings metric reflects the potential base revenue well into the future, the billings metric reflects the potential revenue for the month of the invoices issued. Unlike bookings, which can be differentiated between new bookings, updated bookings, and renewal bookings to further analyze the growth of your market, the billings metric does not discriminate on the type of subscriptions used by the users.
Why should you calculate billings?
As the billings reflect the potential revenue you will receive for the month stated in the invoice, usually the current month, the billings give you an idea of the amount of cash entering your business. The resulting cash flow is important because it dictates your capability to do the following:
Reinvest in the business
Return money to shareholders
Provide a buffer against future financial challenges
In cases where you need to raise more funds, the billings metric combined with its dates will give you an idea when to schedule those activities.
How should the billings be analyzed?
As stated in the previous section, billings represent the potential cash flow to your business. This means that billings can be used for projecting the cash flow. An increasing cash flow does not only signal that your user base is increasing over time, but it also gives you more freedom to pursue investments to your business, such as expansion and improvement of your services. A decreasing cash flow does not only mean your user base is decreasing over time, but it can restrict the possibilities for turning the business back to growth.
How can you improve your billings?
Just like bookings, the higher the billings, the better! Below are two ways to improve your billings.
Convert short-term subscriptions to long-term subscriptions
Each subscription that is renewed monthly can be potentially converted to long-term subscriptions. When you convert them to long-term subscriptions, you increase the amount of potential assured revenue every month. A portion of your users will opt to convert to long-term subscriptions themselves after trying it for a few months. However, you may need to personalize the experience and accommodate the requirements of other users, as they will often have changing needs and would like to see whether the SaaS your business is offering fits with their needs.
Offer discounts to users when they opt for a long-term subscription
Since the billings are tied to the resulting cash flow, it will make more sense to entice your potential users to sign up for long-term subscriptions that will pay the full price upfront. This is common for annual subscriptions, where the user pays 12 months’ worth of subscription. This also solves the problem of adjusting for the risk when projecting cash flow from bookings and billings.