At Elaxtra Advisors, we recognize the critical importance of tracking financial performance in the technology services industry. While recognized revenue often takes center stage as a vital financial metric, it is equally essential for company leaders to monitor bookings, which serve as a leading indicator of future business activity and growth.
Why Bookings Matter for Sustainable Growth
Effectively utilizing a Customer Relationship Management (CRM) system allows the sales team to track opportunities throughout the sales pipeline. Each opportunity will have basic data points, including:
- Total Contract Value (TCV)
- Expected Close Date
- Probability of Closing
This granular visibility gives management insights into upcoming business, enabling more accurate forecasting and informed decision-making.
For instance, a sales pipeline might include deals ranging in value from $100k to $1m, each with varying probabilities of closing. Aggregating these opportunities offers a comprehensive view of potential future revenue. The sales operations team can estimate a weighted pipeline by applying the likelihood of closing to each deal, resulting in a more precise forecast of expected bookings.
From Closed Deals to Recognized Revenue
When a deal is signed and moved to the "closed won" stage in the CRM, it is officially considered "booked." Bookings represent the total value of contracts signed during a specific period, providing an early indicator of future revenue streams.
However, it’s important to note that bookings do not translate directly into recognized revenue. Revenue recognition typically occurs over time as services are delivered, which may extend over several months or even years, depending on the contract terms.
Example: If a $400k deal is booked in March for an 8-month project, the company will recognize revenue incrementally as the project progresses, likely beginning in March or April and concluding by the end of the year. Thus, bookings serve as a forward-looking metric that offers a glimpse into the company's future financial performance, while recognized revenue reflects the realization of those bookings over time.
The Importance of Sales Pipeline Visibility
Accurate sales pipeline data is invaluable for management teams and the finance department. The finance team relies on CRM data to forecast future revenue, enabling better financial planning and resource allocation. By closely monitoring bookings and recognized revenue, companies can ensure alignment with their financial goals and make more informed strategic decisions.
Elaxtra Advisors is an M&A and value-creation advisory firm that assists institutional investors, private equity-owned platforms, and strategic acquirers invest and create value worldwide technology services companies. Please contact us to explore potential partnerships.