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.