Everything you need to know about billings in SaaS

Why are billings important in SaaS?  

Billings is a fundamental financial metric that represents the total amount of money the company has invoiced to customers for subscription services during the accounting period. 

Effective and transparent billings enables SaaS CFOs and finance teams to:

• Predict cash flow: By understanding billing patterns, businesses can better anticipate and manage their cash flow.
• Assess sales and marketing performance: Billings reflects the effectiveness of sales and marketing efforts in acquiring and retaining customers.
• Inform investors: Investors and analysts use billings, bookings, and revenue (together) to evaluate a SaaS company’s financial health and growth potential.
• Understand subscription trends: Billings reveals trends in subscriptions by indicating whether customers are upgrading, downgrading, or maintaining their subscriptions. It can help plan targeted sales and marketing campaigns to move the needle in the right direction. 
• Indicate customer retention: Consistent or growing billings from existing customers can signal strong retention and potential upsell opportunities.
• Validate the business model: In the early stages, increasing billings growth can validate a SaaS company's business model and market fit.
• Determine resource allocation: Understanding billings trends helps companies make informed decisions about where to invest resources for maximum growth.

The process of billings collection starts when your accounts/finance team raises an invoice for product(s)/service(s) delivered to their customers, across different time frames (monthly/quarterly/annual subscriptions). 

Taking billings a step further, calculated billings is another metric mostly used by subscription-based businesses to assess their sales achievements during a specific time period.

It is determined by adding the total revenue recognized within a particular time frame to the change in deferred revenue during the same period — to provide a more nuanced picture of sales performance and potential cash flow.

Understanding the different types of billings in SaaS

When it comes to SaaS, billings isn’t a one-size-fits-all. 

Every company (and every customer) may have a unique billing frequency, cycle, or payment terms, tailored to meet specific needs and preferences. This flexibility allows SaaS businesses to cater to a diverse customer base and optimize revenue streams. 

Here’s a look at some of the different types of SaaS billings:

• Upfront billing: This model involves a one-time fee paid before the customer receives the product or service. It is particularly common for annual subscriptions or long-term commitments. For instance, a customer might pay for a full year of service in advance (sometimes with a discount). This approach not only generates immediate cash flow for the SaaS company, but also is attractive to customers looking for cost savings.

• Recurring billing: This is the most common billing type in (subscription-based) SaaS companies, providing a predictable revenue stream. Customers pay a regular, ongoing fee to access the software or service, typically on a monthly or quarterly basis. This billing type allows for easier budgeting and forecasting for both the SaaS company and the customer.

• Usage-based billing: In this case, customers are billed based on their actual usage of the product/service. It can be particularly appealing for customers who have fluctuating needs or are unsure about their usage levels. For example, a customer might pay for the amount of data storage they use or the number of API calls they make. This can lead to higher customer satisfaction as clients only pay for what they use, but this type of usage-based billing can make revenue forecasting more challenging for the SaaS provider.
  
  Tiered billing is a type of usage-based billing, wherein different combinations of services/features/pricings are “packaged” and offered to customers per their consumption requirements, e.g., basic, premium, and enterprise services, with the option to upgrade or downgrade as their requirements evolve. 

• Hybrid billing: Many SaaS companies combine different billing types to create a hybrid model, especially for larger clients/enterprises.  For instance, they might charge a base recurring fee (also known as the contracted minimum) for core features, with additional usage-based charges for premium features or extra capacity. This approach can provide a balance between predictable base revenue and the potential for increased earnings from heavy users.

• Perpetual licensing with maintenance fees: While less common, some companies offer a one-time perpetual license fee with ongoing maintenance or support fees. This can be attractive to customers who prefer to ‘own’ their software but still want regular updates and support.

Selecting the right billing model can go a long way in deciding your company’s financial stability, even with the added complexities.

How do billings and collections impact cash flow?

When it comes to SaaS, the relationship between billings, collections, and cash flow is crucial for maintaining financial health, which, in turn fuels growth. 

Billing collections refer to the process of collecting payments from customers, including raising and issuing invoices, following up on outstanding payments, and reconciling accounts receivable.

At its core, the billing process helps with:

• Projecting future cash receipts from customers
• Identifying unpaid invoices and outstanding amounts
• Managing and optimizing payment cycles

The billings and collection process has a direct impact on cash flow. Let’s see how! 

• Step 1: Issue the invoice: The invoice is generated based on the agreed payment terms with the customer for the subscription period and services provided. 
• Step 2: Understand the payment terms: Payment terms may differ from customer to customer, such as net 15, net 30, or net 60 terms, which indicate when the payment is due after the invoice has been shared. Based on the payment terms, each invoice includes a due date. This date is crucial for both the SaaS company and its customer, as it sets clear expectations for when payment should be received.
• Step 3: Manage collections: This is when finance/accounts teams ‘follow up’ on the issued invoices to ensure that they receive  timely payments. Effective collections practices are essential for maintaining healthy cash flow.
• Step 4: Record cash flow: When the customer makes the payment, it contributes to the company's cash balance, which is reflected in the balance sheet. 

An analysis of billing and collection patterns can reveal opportunities for enhancing cash flow management.

For example, businesses can prompt customers to make early payments through attractive incentive programs, boosting cash flow and strengthening customer relationships. It can also help identify customers with consistent late payment habits and develop targeted strategies to address these issues. 

Further, by leveraging billing and collection data, you can forecast cash flow with greater accuracy and make more informed decisions around pricing structures or payment terms to better align your cash flow requirements, ensuring a healthier financial outlook.

How to calculate billings for your SaaS business

To calculate the total billings for sale, you would need to add all of the applicable elements, such as the cost of the software, taxes, any add-on services, and deduct any discounts.

The total would be the amount the customer is expected to pay for the software.

Note that the quantity of software could be defined as the number of subscriptions, the number of licenses, or some other unit or combination of units if your company employs a usage-based pricing model. 

For example, let’s assume your SaaS company is selling a subscription at the cost of $100 per month, and the customer is being charged a sales tax of 10%. Taxes and discounts were not applicable for this customer. Applying the billings formula we have:

For ensuring accuracy in the billings calculation, you need to consider the following factors (in relation to the formula): 

• Cost of software: This is the base price for your SaaS product or service, e.g., monthly/annual subscription fee, license fee, rate per unit, etc.
• Quantity: This could be the number of subscriptions, licenses, or usage (consumed) units, depending on your pricing model.
• Taxes: Depending on the region (your headquarters as well as the customer’s location), various local or international taxes could be applied. This varies by jurisdiction and may include sales tax, VAT, GST, or other applicable taxes.
• Discounts: This includes any promotional offers new customers or during special events, loyalty discounts, or volume-based price reductions.
• Add-ons or premium features: This accounts for any additional services beyond the base package.

In some cases, your finance/accounts team should consider additional factors that could lead to complexities when issuing the invoice, such as:

• Prorations: When customers upgrade, downgrade, or cancel mid-billing cycle, you have to calculate partial charges.
• Currency conversions: For international customers, exchange rates and any associated fees must be considered.
• Contract terms: Some enterprise customers may have negotiated rates or special billing arrangements.
• Freemium models: If you offer a free tier, ensure your billing system can handle the transition to paid plans.
• Usage thresholds: For usage-based models, you might have different rates above certain usage levels.

Calculating billings might seem straightforward here, but it isn't always so as explained in this comprehensive example that shows how SaaS companies record and account for bookings, billings, and revenue. 

Factors affecting billings and collections 

In the SaaS industry, various factors can significantly impact billings and collections, ultimately influencing a company's cash flow. 

• Customer satisfaction: If the software does not meet expectations (given the fees charged) or has frequent outages/bugs, customers may delay payments or consider cancellation. Poor troubleshooting support, along with inconsistent communication regarding fees and terms & conditions can result in tremendous customer dissatisfaction and payment delays until the issues are resolved.

• Pricing strategy: Customers must feel that the pricing aligns with the value that the product offers, else they may resist payments or seek alternatives. You must also carefully review the pricing of your competitors as price is a major factor for customers before deciding on the product. Sudden or significant price increases can also lead to customer pushback, affecting collections.

• Market conditions: Overall economic conditions, industry-specific challenges, and seasonal fluctuations, have a direct impact on billings. 

• Payment terms: Longer payment terms (e.g., Net 60 or Net 90) can significantly affect your company's cash flow. While early payment discounts or late payment penalties are good, they might impact your revenue stream or strain client relationships, respectively. Even mid-cycle changes (upgrades, downgrades, or cancellations) can complicate your billings calculations and potentially delay collections

It is important to regularly assess customer satisfaction and address any issues promptly, beginning with a transparent invoicing process, involving clear communication, followed by a streamlined onboarding and ongoing customer support.

Billings dashboard: Billings metrics to track 

Billings is the financial pulse of a company, acting like the bridge between bookings and revenue. It offers a comprehensive view of a company's financial landscape.

However, using traditional software or manually tracking and managing billings can be quite cumbersome. 

Financial reporting and management tools enable SaaS companies to monitor key metrics in real-time, forecast future billings, and make data-informed decisions, reducing manual errors and complex calculations to provide insightful billing (and cash flow) trends.

With Drivetrain, finance teams can not only track and manage billings effortlessly, but also build custom dashboards that provide real-time visibility into your overall bookings, billings, and revenue metrics and trends.  Just a few of the billings-related metrics you can track in Drivetrain include DSO, billing aging, AR turnover ratio, invoice status, collections by quarter, collections effectiveness index, average collection period, monthly cash receipts forecast vs. actual, bill rate, and billable utilization rate. 

Drivetrain’s intuitive platform combines powerful FP&A features with the familiarity of the spreadsheets and ensures finance teams and other departments can collaborate easily, to:

• Track key billing metrics at a glance and analyze billing trends over time.
• Forecast future billings based on historical data.
• Identify potential issues or opportunities in the billing cycle.
• Generate detailed reports for stakeholders.

By leveraging Drivetrain's capabilities, SaaS companies can streamline their billing processes, improve financial forecasting accuracy, and gain deeper insights into their revenue streams. 

Stay ahead of the curve and navigate the complex land of SaaS finance with Drivetrain.