From Bookings to Recognized Revenue in Technology Services
Company management and sales teams track revenue closely. Revenue is reflected as the top line in the income statement, arguably one of the most important line items in all financial statements. Only some leaders, though, track bookings.
When a company is fluent in using a CRM system, the sales team creates a pipeline of opportunities with specific opportunity data such as deal amount, expected close date, and stage/probability of closing. As multiple opportunities are added to the CRM, the team can start providing management with visibility into incoming business activity for the company.
For example, for a specific company, the sales pipeline might include 20 deals with different total contract values (TCV) from $100k to $1m, different expected close dates within the following 10 months, and different probabilities of closing from 20% to 80%. The unweighted pipeline may add up to $10.5m for all deals, and the weighted pipeline can add up to $4.3m (applying the probability of closing to each opportunity). If we divide by the expected close date, we start to see weighted TCV amounts by month for the following 10 months.
When a customer deal is signed, it is pushed to the closed won stage in the CRM (100% probability), and the customer project starts. The total deal amount confirmed in the CRM has been “booked.” The sum of the deal amounts closed won per month is what we refer to as the total bookings for that month.
The booking amount does not translate directly into revenue, given that revenue will be recognized periodically in the future. For example, a $400k deal booked in March that lasts an estimated 8 months means the company will start invoicing the customer probably from March/April, and the project may finalize in December. This means that deals booked are a proxy for future revenue at the company. CRM information is key for the finance team to help estimate revenue data for future periods.
As we connect with companies we look to partner with, we enjoy exploring the company’s sales pipeline, bookings, and recognized revenue together, given how connected these are.
At Alten Capital we invest in technology services. Please reach out to us to explore potential partnerships.