The key test for an acronym is to ask whether it helps or hurts communication.
-Elon Musk
I think it's really important to understand the business vernacular ($20 word of the day) around incoming monies and how they're discussed between different departments. It can be an alphabet soup of acronyms and finance terms, that can confuse. I routinely hear the misuse of these terms, and thought I just lay down a level set. For some, you may know these already, but a great primer if you find yourself in a conversation with the CFO or CRO.
First off, let’s talk about 3 typically confusing terms and get a solid foundation. Bookings, revenue, and billings are all related terms that are often used in the our sales and business world to refer to the process of acquiring and trading goods or services, and collecting our favorite thing: money. While these terms are often used interchangeably, there are distinct differences between them that are important to understand for any professional in our line of work, especially as you rise in the ranks.
Signing the deal- First, let’s start with what happens in sales: getting that sales order signed. Bookings refer to the process of an agreement between a customer and a vendor in which the customer agrees to purchase a good or service. This agreement typically involves signing a contract that outlines the details of the transaction. Bookings do not necessarily involve an exchange of money, but rather a commitment by the customer to purchase the good or service at a future date.
Getting paid-Then, on the dark side (aka accounting), revenue refers to the money that is actually exchanged in a transaction. It is the amount of money that a company earns from the sale of its goods or services. Revenue is recorded when money is received, not when an agreement is made.
Sending the Bill - Billings refer to the total amount that a customer is invoiced for a purchase. This amount includes both the cost of the goods or services sold, as well as any taxes, shipping, or handling fees. A company’s billings are typically higher than its revenue, since it includes items that are not yet paid for or collected.
In summary, bookings refer to an agreement between a customer and a vendor, revenue refers to the money that is exchanged in a transaction, and billings refer to the total amount that a customer is invoiced for a purchase. Unfortunately, these terms and typically and often used interchangeably, it is important to understand the distinct differences between them.
Now some acronyms and definitions:
ARR (Annual Recurring Revenue): ARR is a metric used to measure the amount of revenue that a company can expect to receive on an annual basis from their current customer base. This number is calculated by taking the total amount of money that a company has earned from their recurring customers over the course of a year and dividing it by the total number of customers.
MRR (Monthly Recurring Revenue): MRR is a metric used to measure the amount of revenue that a company can expect to receive on a monthly basis from their current customer base. This number is calculated by taking the total amount of money that a company has earned from their recurring customers over the course of a month and dividing it by the total number of customers.
Billings: Billings is a term used to refer to the total amount of money that a company has billed its customers for goods or services. It is important to note that billings does not necessarily equal the amount of money that a company has actually collected, as some customers may not have paid yet.
Bookings: Bookings is a term used to refer to the total amount of money that a company has earned from its sales. This number is calculated by taking the total amount of money that a company has billed its customers for goods or services, minus any discounts or returns that may have been given.
ACV (Average Contract Value): ACV is a metric used to measure the average amount of money that a company earns from each customer contract. This number is typically calculated by taking the total amount of money that a company has earned from all of its customer contracts over the course of a year and dividing it by the total number of customer contracts.
Customer Acquisition Cost (CAC): CAC is a metric used to measure the total cost associated with acquiring a new customer. This cost includes all marketing activities, such as advertising, promotions, sales, and customer service, as well as any costs associated with the products or services themselves. CAC is an important metric for businesses to understand because it allows them to determine how successful their marketing efforts are, as well as how effective their pricing strategy is.
Customer Lifetime Value (CLV): CLV is a metric used to measure the total value a customer brings to a business over the course of their lifetime. This includes all revenue generated from the customer, as well as the cost of retaining them, such as customer service, discounts, and loyalty programs. CLV helps businesses understand how profitable a customer is and how they can maximize their profits from each customer.
Total Addressable Market (TAM): TAM is a metric used to measure the total potential size of a market. This includes all potential customers who could be reached with a product or service, as well as their willingness to buy the product or service. TAM is an important metric for businesses to understand because it allows them to determine the potential size of their customer base and how much revenue they could generate from it.
Just a shorty to help you talk intelligently and understand the most commonly used and misused sales terms. Did I miss any?