With small-to-midsize professional services firms, there tends to be confusion related to the topics of bookings (or sales), billings, and revenue. It is important for firm leadership to understand these separate (but related) concepts as there are implications to the company financials, income tax obligations, and sales compensation plans.

To best explain the differences between these concepts, we will use a sample client engagement. Let’s suppose your mobile app consultancy has been hired by Acme Company to build a customer loyalty application. The contract is for $100,000 with $50,000 due at signing and $50,000 due at the completion of the project.

Bookings

Bookings are simply the total amount of sales in a period of time (typically a month). So, in our example, the entire $100,000 related to the Acme Company mobile app would hit your bookings for the month in which the contract was signed. Even if you haven’t cut an invoice yet or started working on the project, you would capture the entire $100,000 in bookings immediately upon contract execution. Note that bookings are not revenue and do not show up in your accounting platform or on your income statement.

Billings

Billings correlate to your total invoices for a period of time. Since $50,000 was due from Acme Company upon contract signature, that $50,000 would contribute to your total billings for the month in which the invoice was created. Again, the $50,000 would count toward billings even though none of the services have been delivered. The $50,000 would be reflected in the accounting system in the form of an invoice but shouldn’t be reflected as revenue just yet.

Deferred Revenue

Any time your firm collects revenue that it hasn’t earned, that revenue should be reflected on the balance sheet in a liability account called “Deferred Revenue” (or alternatively, “Unearned Revenue”). In the case of your initial $50,000 invoice to Acme, none of that was earned when the invoice was created because you hadn’t started working yet. Thus, the entire $50,000 should sit on the balance sheet in Deferred Revenue, waiting to be moved to the income statement as the project is delivered.

Revenue

Revenue is the actual dollar amount that can be recognized in a month given the percentage of the project that was completed during the month. While the concepts of bookings and billings are simple, revenue and when you can recognize it can get a little more involved.

If during the first month of the project you complete just 10% of the project work, you can recognize $10,000 in revenue during the month. Your accountant would move $10,000 out of the Deferred Revenue balance sheet account into your services revenue account on the income statement. If in the second month the total percentage complete reaches 30%, an additional $20,000 would be moved to the income statement.

Since your final $50,000 in billings won’t exist until after you complete the entire project for Acme Company, what happens after the first $50,000 has been fully recognized on the income statement? You can actually run a negative balance in the Deferred Revenue liability account and recognize revenue on the income statement that you haven’t even invoiced for yet. Yes, that is a bit confusing! But following proper revenue recognition processes makes it much easier to manage the company and compare one month to another. Running a consultancy without proper revenue recognition procedures causes a highly-variable revenue line and wild swings in profitability from month-to-month.

Note that time and materials (hourly billing) engagements rarely require revenue recognition procedures. With time and materials projects, you are invoicing for the work that was completed in the given month. Thus, you are rarely invoicing more or less than what was earned and do not need to use the Deferred Revenue balance sheet account.