Billings and revenue are financial terms that are easily confused or used interchangeably, but they have very different meanings and different implications in understanding the financial health and growth of your business.
Why Billings Matter
Billings are the amount of sales and services that you invoice your customers for over a specific period. Billings are typically recorded when you generate the invoice, not when the payment is received. As such, they provide valuable insight into demand for your products and services and your ability to generate sales. However, there are two complications to be aware of when using billings to evaluate financial health.
One catch is that billings do not directly represent revenue earned by your company, because some invoices may not be paid on time or may not be paid at all. The second catch is that billings can create a misleading appearance of high growth and earnings over a given period if, for example, customers are given steep discounts for pre-paying. Ultimately, those discounts could lead to lower total revenue.
Why Revenue Matters
Revenue refers to the actual income your business earns after providing services or products to customers. By GAAP standards, revenue can only be recognized once it is “earned”—when the product is delivered or the service is provided, you can then record it in your financial statements.
Revenue is a critical financial metric for businesses, and investors put a lot of weight on it because it represents the actual inflow of funds. Revenue is used to calculate financial ratios and indicators, such as gross profit margin, net profit margin, and earnings per share. It also factors in adjustments for sales returns, allowances, and uncollectible amounts, providing an accurate representation of your company’s financial health.
In summary, billings provide valuable insights into sales activity and customer demand, while revenue reflects the financial performance and profitability of your business. Both play a key role in assessing your company’s financial health and growth.
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