Accounts Receivable

Understanding the Impact of Unbilled Receivables on Your Bottom Line

February 01, 2024

Common among subscription-based software-as-a-service (SaaS) businesses, unbilled receivables is revenue the company has earned, with invoices sent in arrears. Simply put, unbilled receivables equates to the amount of revenue that is billable.

For subscription-based companies, revenue is received on a monthly, quarterly, or annual basis even if invoices have yet to be generated. Regardless of the business model, most companies encounter unbilled receivables – which is an asset account that represents the value of the products or services provided to the customer.

Why Companies Have Unbilled Receivables

In contrast to cash accounting, unbilled receivables is when the company is paid in advance and the amount is entered as an asset on the balance sheet. This typically occurs in businesses that use accrual accounting, which states that revenue is recognized when the products are delivered or services rendered – regardless of whether an invoice has been sent.

Let’s look at some of the most common reasons your business may have unbilled receivables.

Advanced Payments/Prepayments

Until the goods or services are delivered, payment is recognized as unearned revenue (a liability). This happens when a customer upgrades their products/services or purchases complementary products during their subscription period. Once the goods are delivered, the unearned revenue is reclassified as revenue.

Billing Cycle

If the company recognizes revenue at the end of each month but sends invoices at the start of the following month, the timing of the billing cycle may not align with recognizing the revenue received.

Invoice Delays

This occurs when there are invoice generation delays or recurring payment is received prior to the invoice being sent.

Long-Term Projects

When products or services are provided over an extended period, revenue is recognized as contractual milestones are achieved – even if the invoice is sent at a later date.

One-Time Projects

Especially prevalent for SaaS companies where customers are billed after implementation completion.

Service Completion

Similar to the billing cycle, there’s a lag in billing processes (administrative delays, customer-specific billing cycles, ect.), and invoices are sent after services are completed.

Regardless of the underlying cause, keeping tabs on unbilled revenue is essential.

The Importance of Unbilled Revenue

As unbilled receivables represent revenue that will eventually be recognized, its importance can’t be stressed enough with respect to financial reporting and analysis. A glitch in the process can negatively impact a company’s accounts receivables, their revenue, and ultimately their financial health.

There are three primary considerations when it comes to tracking unbilled revenue.

  1. Regulatory Compliance: Compliance with ASC 606 or IFRS 15 requires that businesses recognize revenue only when it is earned, even when an invoice has yet to be generated. Both standards follow the five-step process for revenue recognition – identify the contract with the customer, identify the contract’s performance obligations, set the transaction price, allocate the transaction price to performance obligations, and recognize revenue when the performance obligation(s) are satisfied. This blog on Understanding ASC 606 Revenue Recognition covers more.
  2. Financial Performance: Financial business planning such as budgetary considerations, investments, and revenue forecasts require your finance team to have accurate insights into how much the company will earn from future invoices.
  3. Revenue Leakage: Incorrect tracking of unbilled receivables and forgotten or missed invoices can result in losing earned income.

When earned revenue isn’t recognized or recognized incorrectly, companies face ramifications such as GAAP noncompliance, incomplete or inaccurate financial data that can negatively affect business decisions, and revenue leakage resulting from money that wasn’t accounted for or accounted for incorrectly. Over time, these risks have the potential to cost the business millions of dollars.

Manage and Track Unbilled Receivables

Track unbilled receivables using the five-step process.

  1. Identify and record unbilled revenue: Be sure to include all revenue earned from completed or ongoing projects, as well as payments that have been made in advance of invoice generation. Initial revenue recognition is typically done through a journal entry that debits the appropriate revenue account and credits an unbilled receivables account. Create an ‘unbilled receivables’ account on the balance sheet and record the total amount for this category as an asset.
  2. Review and update on a regular basis: Identify unbilled revenue by frequently reviewing all contracts, project completions, and product/service delivery. It may help to put a systematic process in place that notifies the appropriate personnel that completion of this task is pending.
  3. Create and send invoices: Create and send the invoice based on contract terms and predetermined schedules. Be sure the invoice contains all relevant information like details of the products/services provided, quantities, pricing, terms, etc., and send the invoices to the customers.
  4. Record the invoice: Using a journal entry, debit the unbilled receivables account and credit the accounts receivable account. This process transfers the recognized revenue from the unbilled receivable account to the accounts receivable account.
  5. Recognize revenue: When payment is made, debit the accounts receivable account and credit the cash or bank account for the payment amount.

Let’s use an example to show the flow of this process

Suppose a B2B software company sells a customer a software package that requires custom coding. The total cost of the software and implementation is $50,000 and the timeline for completion is 6 months. Terms of the contract include two milestone payments – the first payment ($25,000) is due at the end of month 3 and final payment ($25,000) upon software delivery and implementation – month 6.

At the end of month 3 (milestone 1), the following journal entries are made.

  • Debit $25,000 to unbilled revenue
  • Credit $25,000 to the revenue account

Upon project completion, end of month 6 (milestone 2), the following entries are recorded.

  • Debit $25,000 to the revenue account
  • Credit $25,00 to unbilled revenue

Additionally, since the project is complete and payment has been made, the following entries will also be made.

  • Debit $50,000 to accounts receivable
  • Credit $50,000 to the revenue account

While a simplistic view, keep in mind that accounting practices vary by both company and industry, and of course recognizing revenue needs to be in compliance with ASC 606 or IFRS 15.

Strategies to Minimize Unbilled Revenue

While unbilled revenue is a fact of life, there are strategies you can use to minimize the situation and alleviate negative repercussions. Here are some proven strategies to help ensure unbilled receivables don’t impact your organization.

  • Implement controls to ensure that invoices are generated promptly and accurately.
  • Create billing schedules that align with your revenue recognition practices.
  • Communicate your billing and payment expectations to customers.
  • Create invoices after payment is received to minimize your balance sheet of unbilled receivables.
  • Send invoices earlier to account for billing delays.
  • Set clear payment terms and proactively manage the collections process, including dunning emails to remind customers of when payment is due.
  • Reconcile your unbilled receivables account frequently to ensure there are no discrepancies.
  • Review customer contracts on a period basis to ensure they are in alignment with your revenue recognition and billing processes.
  • Report unbilled receivables in financial statements and disclosures.

If handled accurately unbilled receivables won’t be detrimental to your company or its growth, it’s only when left unchecked that they can become financially damaging.

Keep Unbilled Receivables to a Minimum

Depending on your industry, you’re probably dealing with unbilled receivables. While it isn’t a negative, you want to do everything possible to keep it to a minimum. Are you handling accounting processes manually or using an obsolete billing solution? Is revenue slipping through the cracks? If so, now may be the time to plug financial gaps resulting from unbilled receivables.

To accurately and efficiently handle today’s financial complexities you need a billing platform that will enable you to keep unbilled receivables to a minimum. You want one that:

  • Ensures timely, accurate, and automated billing
  • Provides automated notifications when thresholds have been reached
  • Provides for flexible strategies to minimize days sales outstanding (DSO)
  • offers a collection dashboard for a real-time view to all outstanding debt
  • Gives customers with a self-service portal to manage accounts, make payments, enroll in autopay, etc.
  • Generates a wide range of ready-to-use reports, provides a full suite of tools to build custom reports, and offers analytics to optimize billing performance
  • Offers seamless integration to up or downstream systems for a complete financial ecosystem

BillingPlatform provides all of this and much more. Our cloud-based billing solution enables companies to run their business with greater efficiency, accuracy, control, and trust. This complete solution fulfills 100% of your business requirements – CPQ, usage processing, rating, invoicing, payments, collections, customer portal, reporting, analytics, revenue recognition, and A/R subledger.

With us, you get more out-of-the-box functionality than any solution on the market today, enabling you to automate the entire revenue management process and minimize unbilled receivables. Contact a member of our team to see us in action.

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