deferred revenue made easy

As all of my companies approach quarter end right now, I am having active discussions with the sales folks about quarter-to-date bookings and then translating into revenue for management to measure against Q1 targets.  As this is the first quarter in what is expected to be a completely recessionary year a LOT of pressure will be on Q1 results to determine if you are going to be a survivor or not this year.

As I’ve mentioned before, recognizable revenue is not black and white and conservative interpretation is the best approach.  What, at a tactical level, does this imply?  Recognize less up front and defer the rest over the period that you are delivering the goods/services.  At this point, my conversations then switch to the Controller who is left with the thankless task of having to determine what portion of revenue should be deferred (under extreme pressure from sales!) and then accurately recognizing it over a certain period.

Just so my Controller and I are on the same page - what exactly is deferred revenue?

As one of the revenue recognition criteria is “delivery”, deferred revenue is revenue not yet earned because the delivery of goods or services is outstanding and still owed to the customer hence it remains a liability on the balance sheet.

Now, if you have only one customer, it is easy to track when and how much of the deferred revenue to recognize each month.  For instance, you are a software company, you sold $1200 of annual maintenance and support therefore you get to recognize $100/month over a twelve month period as you “deliver” the technical support for that product.  Simple!

Now imagine you have 300 customers a month with an average order value of $100 and you need to recognize revenue accordingly - some is support (easy over 12 months, or maybe 24 months because sales sold two years up front) or maybe some is milestone based professional services based on acceptance clauses.  Oh, and your auditor will want you to provide, by invoice, supporting documentation as to what was recognized each month.  Hah!  I’ve seen some pretty hellish spreadsheets to try and support various sales.

How will my Controller keep track of all these transactions?!?!?

Fortunately, Business Ready has a Deferred Revenue template that easily allows you to drop in the invoice detail and by using some funky date validation, start and stop amortization dates, and straight forward groupings not only will your Controller be able to recognize a multitude of transaction variations but they have audit ready working papers every month so come year end, when they need to defend why they recognized what, they are good to go!

I’d get to this earlier in the year so that this month end task doesn’t take forever and frees up more of your time for analysis which is what management REALLY wants during these recessionary times.  Hope this helps!