Many companies fail to calculate their ARR correctly. A poll of 50 SaaS companies found that 40% were miscalculating their ARR amount.
You may be wondering how difficult could that be. After all, ARR = MRR * 12, right?
Well, the answer is not so simple for subscription-based businesses. And one of the main reasons for not tracking unbilled revenue and unearned revenue correctly.
Incorrect revenue recognition can worry investors, create headaches for the finance team, and lead to non-compliance with regulatory requirements. What’s even worse is that it may cause you to misjudge your business's true financial health and future trajectory.
This article will help you understand the differences between unbilled revenue vs unearned revenue. It will help you optimize revenue recognition, predict future revenues, and monitor growth trends appropriately.
Unbilled revenue is the revenue your company has earned or recognized but hasn’t been billed yet. It represents the value of subscriptions already provided to customers during a specific period. In simple words, unbilled revenue is simply awaiting invoicing and collection.
While this revenue hasn't yet reached the company’s accounts, it's still a critical part of your revenue. In SaaS, unbilled revenue happens in cases of:
Unbilled Revenue should be treated as an asset until the customer can be billed. It should be moved to accounts receivable when the customer is billed.
Unbilled revenue is also known as accrued revenue, unbilled account receivables, and unbilled receivables.
Unearned revenue is the opposite of unbilled revenue. It is the revenue that hasn’t yet been earned. In SaaS, customers typically pay upfront for subscriptions.
The advance payment for which the services have not been rendered yet accounts for unearned revenue. Recognizing and accounting for unearned revenue is significant because it affects a company’s financial statements and can impact its future investments.
Unearned revenue comes in various forms. Some common examples include
1. Annual subscriptions: When customers prepay for subscriptions, the payment received is unearned revenue until they use the service.
2. Contract services: Unearned service revenue is money collected in advance for future services. The revenue stays unearned until you deliver the agreed-upon services to your client.
3. Implementation/Onboarding fees: When you charge customers a one-time fee for the implementation or onboarding process, you receive this fee before providing the service. Here, revenue recognition aligns with the completion of onboarding.
4. Feature add-ons or upgrades: If customers pay upfront for additional features or upgrades, revenue is present until the enhanced features or upgrades are implemented and accessible.
In other cases like customization, license fees, training, etc, whatever is paid in advance is your unearned revenue.
Unearned revenue should be treated as a liability because it represents a service or product that you are obligated to provide in the future.
It is also known as deferred revenue, prepaid revenue, and customer deposits.
As a quick TL;DR of unbilled revenue vs unearned revenue, here are the differences:
Now, why does understanding the differences matter? SaaS businesses have a high volume of sales. In addition, they tend to offer a complex product mix—subscriptions based on usage, implementation fees, training costs, discounts, etc. Understandably, it doesn’t exactly make it easy to calculate your accrued and deferred revenue.
Without a clear understanding, it's impossible to have an accurate picture of your current financial health and how you're stacking up to growth goals. Incorrect calculations of your SaaS gross margin and recurring gross margin are also challenging.
That’s not it. You won’t be able to calculate critical metrics like customer lifetime value (CLV) or CAC payback period correctly. All these challenges can snowball into more significant financial problems.
The answer to this conundrum lies in better understanding and managing your revenue. In a nutshell—efficient sales and finance operations.
Cash flow isn't intuitive. Don't try to do it in your head. Making the sales doesn't necessarily mean you have the money. Incurring the expense doesn't necessarily mean you paid for it already. Inventory is usually bought and paid for and then stored until it becomes cost of sales.
SaaS businesses have a high sales volume. In addition, they tend to offer a complex product mix—subscriptions based on usage, implementation fees, training costs, discounts, etc. It isn’t
Calculating your accrued and deferred revenue isn't straightforward; especially for SaaS. This is largely due to high sales volumes, and a complex product mix including subscriptions based on usage, implementation fees, and discounts.
To fix these problems, companies turn to spreadsheets and spend hours trying to track their exact revenue.
More than 80% of business failures are due to poor cash management. Staying on top of cash flow management can be challenging without the right tools. Fortunately, Quote-to-Cash systems make it easier for SaaS businesses to recognize revenue precisely.
When you have complex revenue recognition processes such as subscriptions and recurring-revenue relationships, you must be able to reallocate and modify valuation as these contractual agreements change dynamically. A Q2C solution determines the transaction price at the time of the contract. It also keeps track of contracts that change mid-cycle and don’t necessarily follow simple, linear lifecycles.
SaaS startups having complex revenue recognition features such as subscriptions, multi-year contracts, and recurring-revenue relationships should invest in a modern Quote-to-Cash system. These systems automate your revenue recognition in a way that provides consistency, transparency, and a comprehensive audit trail.
As your ARR grows, revenue recognition should never take a back seat. If you are performing revenue recognition on spreadsheets, it is time to move to a solution built specifically for SaaS businesses.
Cacheflow creates a single data flow from your closed sales quotes to your CRM and accounting system. Shift to Cacheflow, and you don’t have to worry about botched spreadsheets and manually tracking which customers owe payments for new deals, up-sells, and renewals. Automate and collect unearned revenue for accurate cash flow management.
Book a demo with us to learn how we can help automate your revenue operations.
No, unbilled revenue and unearned revenue are not the same. Unbilled revenue is the revenue earned but not billed (invoiced). Unearned revenue is the payment you receive from a customer for products or services yet to be delivered.
Deferred revenue is also known as advance payments or unearned revenue. It is the revenue not earned during a specific period. This revenue is gradually recognized in as the goods or services are delivered. On the contrary, unbilled revenue is known as accrued revenue. It is the revenue a company has earned but has not yet invoiced to the customers.
Receiving payments in advance of a billing date is unbilled revenue. An example of an unbilled revenue would be invoice delays. You have already earned the revenue in this example but have yet to complete the formal billing process.
Unearned fees are usually the payment or fees received in advance by a company. For example, receiving a one-time implementation fee for a one-year subscription to your software platform will be an unearned fee. Unbilled fees are the amounts earned by a company but not yet invoiced to the client. For example, giving add-on features to a client without invoicing will come under unbilled fees.