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It's not really news that understanding your revenue is something of utmost importance these days if you want to consciously grow your business.
But do you know your accrued revenue? Have you gathered all the information you can about it?
This financial concept is of great importance to SaaS companies, where contracts can extend over many accounting periods. So if you're not yet familiar with it, it's time to change that because it's not just another ordinary accounting term.
Therefore, in this article, through real-world examples, we will explain the value of accrued revenue in managing your SaaS business effectively.
At its core, accrued revenue represents the recognition of revenue that has been earned but not yet received. In SaaS, this often occurs when a company provides services to a customer but hasn't received payment for those services.
So, accrued revenue definition is essentially about money that you've earned but haven't physically obtained.
This revenue is a key component of accrual accounting, one of the two primary accounting methods used by businesses.
In accrual accounting, revenue is recognized when it is earned, regardless of when the actual cash is received. This contrasts with cash basis accounting, where revenue is recognized only when cash is received.
💡 Note: Don't confuse this term with deferred revenue and unearned revenue. Later in the article, we will explain the difference between accrued revenue and the other two metrics.
We have several reasons for this:
It helps SaaS businesses adhere to the revenue recognition principle, a fundamental accounting principle. Therefore, it ensures that your financial statements accurately reflect the revenue your business has earned, providing a clear picture of your financial health.
Managing your accrued revenue allows you to anticipate future cash inflows and outflows, aiding in cash flow management and budgeting. This is particularly vital in the SaaS industry, where subscription-based revenue streams can fluctuate. It enables businesses to maintain stability and allocate resources efficiently, ensuring consistent service delivery and customer satisfaction.
The SaaS industry's long-term success relies on maintaining customer subscriptions. Therefore, recognition of accrued expenses and revenue helps companies:
As a result, it can lead to customer retention and growth.
If you have no idea about accrued revenue journal entries, this section is for you.
Recording accrued revenue involves a series of accounting entries. The specific steps may vary depending on your business and accounting practices, but we can point out a general overview:
So first, determine the amount of revenue that has been earned but not yet received. This could include services rendered, products delivered, or subscription fees accrued.
In your accounting records, typically using a double-entry bookkeeping system, you'll make an adjusting journal entry. Debit an asset account, such as "Accounts Receivable," to recognize the amount you expect to receive. Credit a revenue account, recognizing the money you've earned.
Periodically, reconcile your accrued income with actual payments received. As payments are received, reduce the amount in the "Accounts Receivable" account and recognize it as revenue.
❗ Tip: It's better if you complete the accounting entries on the fly, then, there's less chance that you'll make a mistake with the entries.
Accrued revenue is more than just an accounting obligation, but why should your business prioritize recording the income that is accrued?
Here are the reasons.
👉🏻 Compliance - adhering to the revenue recognition principle is a basis for sound financial reporting. It ensures your business follows generally accepted accounting principles (GAAP) by recognizing revenue when it's earned, not just when cash changes hands.
👉🏻 Accurate financial statements - this metric helps in presenting accurate financial statements, including the income statement and balance sheet, which are crucial for decision-making and financial reporting. Without it, your income statement might show periods of high revenue when, in reality, those earnings are tied to future services or goods delivery.
👉🏻 Transparency - recording this income allows you to provide a clear picture of your company's financial health to stakeholders, including investors, creditors, and shareholders. It demonstrates your commitment to transparent financial reporting and can enhance your credibility in the eyes of potential investors or lenders.
👉🏻 Cash flow planning - also, monitoring it lets you better plan your cash flow and allocate resources effectively.
👉🏻 Legal and tax compliance - properly accounting for accrued revenue ensures your business complies with legal and tax requirements.
Each type of revenue is a fundamental concept in the world of finance, serving a unique purpose and function:
In essence, accrued revenue is about recognizing income that is due to you but not yet received, and deferred revenue (or unearned) is about acknowledging an obligation to deliver services or products in the future.
Let's explore a couple of accrued revenue examples to illustrate accrued revenue in practical terms:
#1 Advertising Services
Advertising agencies may bill clients for advertising campaigns at the beginning of the month, but the contract and performance of the work often refer to the previous month. Accrued revenue helps agencies recognize the income for services rendered even before clients pay their bills. As soon as accrued revenue is realized, it is shown as revenue on the income statement.
#2 Consulting Services:
Imagine you run a consulting firm that offers project-based services. You complete a project for a client in January, but the client pays you in February. In this case, you have done the work in January, and the pay becomes accrued revenue also in January. Thus, it’s recorded as such until you receive payment in February.
#3 Web Hosting
Web hosting companies provide hosting services continuously, often billing customers on a monthly or yearly basis. Accrued revenue helps them recognize the income for the services they provide before customers are billed.
At Valueships, we specialize in helping SaaS companies navigate complex pricing and financial metrics and concepts like accrued revenue.
Our team of experts provides guidance on using accrued revenue, including financial analytics, research, and strategic decision-making. We will also empower you to make informed choices that drive your business forward.
So, don't hesitate and record the revenue and profit as it should be done.
Accrued revenue is revenue earned from providing a good or service but not paid yet. Chances are, you've come into contact with this revenue and don't know how to handle it.
Well, after reading this article, things should change for the better.
If you still have doubts about this revenue, want to know more about how accrued revenue is recognized, or how accrued revenue may affect your business, contact us.
We will help you understand accrued revenue transactions.
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
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Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
