Understanding Revenue Recognition

Woman in an orange jumper giving a presentation Infront of her team. Graphs shown on the screen

Overview

What is revenue recognition? Isn’t revenue a straightforward calculation of the money coming in versus the money going out?

Cash Accounting VS. Accrual Accounting

Companies employ two accounting systems. Smaller firms, with annual revenue under $25 million, use cash-based accounting. For example, a company making shirts records material expenses immediately upon payment and registers revenue on the day of payment receipt.

The issue arises when cash is spent in one period, like December, while payment is received in a subsequent period, such as February. This discrepancy can distort the financial picture. When presenting last year’s accounts, it may falsely suggest underperformance, while showing only this year’s figures might inaccurately imply significant improvement.

What is ‘Earned’ Revenue?

The vast majority of businesses opt for accrual-based accounting. Revenue is only recorded upon full delivery of the promised product or service, regardless of payment timing. Recognition occurs when the revenue is ‘earned’ from an accounting perspective.

This is particularly relevant for large organizations handling extensive projects spanning years. As well as, for companies offering a mix of products and services. For instance, a large engineering firm engaged in a five-year infrastructure project deals with multiple deadlines, various costs, and uneven cash flows. Similarly, a tech company providing bundled packages, including software, consulting, maintenance, upgrades, and technical support, receives payments through a combination of one-off payments and recurring subscriptions.

Inaccurate forecasts and Mismanaged Resources

Whatever area you work in, breaking everything down into discreet tasks that can be measured and accounted for in terms of specific deadlines is crucial. Businesses often create problems for themselves in two areas: inaccurate forecasts and misalignment of project resources.

Gaps appear between predicted costs, provisional timelines, and actual costs and delivery times, exacerbated by spiraling inflation and global supply chain chaos.

Inaccurate forecasting leads to ineffective planning, resulting in the mismanagement and misalignment of resources. Allocating tasks to the right people with the appropriate skills and providing necessary materials, machines, and inventory within a reasonable timeframe is crucial.

Hence, organizations need to utilize Earned Value Management (EVM) systems wherever possible.

Take charge of your data

To prevent delays, waste, and cost overruns due to poorly managed data, immediate access to all data is essential. It’s crucial to monitor everyone’s project status, alignment with budgets, and timelines for swift problem resolution before escalation.

Running an organization lacks a magic formula; it’s straightforward. Overlooking minor issues allows them to grow into major problems, causing delays and deferred tasks. This deferral impacts revenue recognition, leading to a scramble to fill gaps in quarterly figures and affecting margins.

The use of appropriate software is crucial for effective data management. Centralizing and streamlining systems offer instant visibility, enhancing forecasting, planning, and resource management. These enhancements are reflected in figures and revenue recognition.

Related Insights

A team of people having a meeting around a table discussing. Pink and purple gradient lens graphic in the background.
Feb 21 2024

What Are OKRs, and What Are Their 3 Elements?

OKRs are used extensively by everyone from Google and LinkedIn to Adobe and Spotify, and they’re made up of 3 elements. Table of Contents Objectives Key Results...
A large cargo ship carrying containers across the ocean. Pink and purple gradient lens in the background.
Feb 20 2024

Supply Chain Management: The 3 ‘P’s  

There are three areas that efficient supply chain management depends on: Physical resources and operations, Processes and People. 

Civil engineer on a site wearing a high visibility jacket looking at a construction site with a yellow crane. A pink and purple lens icon in the background.
Jan 25 2024

Document Management for Enterprise Organizations: 3 Crucial Areas

There are 3 areas where reliable document management is crucial for enterprise organizations, regardless of the industry.

Human and robot fingertips touch and lightbulb lights up.
Jan 10 2024

AI and Project Management

AI is transforming project management and is changing how PMs operate on three levels: automation, assistance and augmentation.

A man is conducting a meeting with his team in an office.
Jan 09 2024

Change Management: The Key to Digital Transformation

Successful digital transformation depends on two factors; the technology you invest in, and the change management program you devise for your workforce.

Man and a woman wearing glasses discussing work in an office. Both looking at an iPad.
Jan 03 2024

What is Earned Value Management (EVM) and How Does it Work?

Earned Value Management (EVM) is a project management methodology that enables you to integrate scope, cost and schedule.

4 people having a meeting in an office
Dec 06 2023

Project Controls: Deliver Projects on Time and Budget

Project Controls are a set tools that allow you to track costs and schedule to ensure your project comes in on time and on budget.

white TEI report book with navy background
Nov 16 2023

Forrester TEI™ Study Finds Increase in NPV of $30.05M and an ROI of 187%

Forrester’s analysis finds Cora produces efficiency gains worth $25M, improved visibility saving $6.5M, a $7M revenue boost and $4.4M in time savings.