Revenue Recognition

When should consulting businesses record revenue?
Revenues are recognized when they are earned, which varies across companies.
Any consulting company can use Metric.ai flexibility to decide when revenue will be recognized. Internal projects don't bring any revenue. Time & material projects record revenue by billable hours (with an assumption that there is no hours cap otherwise it is a fixed price project). For a project with a fixed price, revenue recognition might be tricky. Metric.ai supports four options:
Cash basis revenue recognition chart
The main rule is that revenue should be recorded when it is earned. So if your company would like to count earnings based on cash, choose the "cash-basis" option in the project budget settings. That way, the system will recognize the budget at the moment of payment.

Example of cash basis revenue recognition

The agency completes the project in parts and gets paid for each stage 7 days after completion.
The recognized revenue is $20,000. As soon as the agency is paid for Part 2, the recognized revenue will be $43,000.
Time basis revenue recognition chart
This tool is suitable when a consulting firm can assume that revenue will be equally spread across the project delivery timeline. While cash collection may vary, time basis revenue recognition is the best choice.
Metric.ai interface, project budget, revenue recognition based on time
Metric.ai interface, project budget, revenue recognition based on time

Example of time basis revenue recognition

The agency got a 100% prepaid project, which consists of one part, for $64,000. Project development will occur from Feb 26, 2018, to May 18, 2018. Progress and results are spread equally across this period. Let's calculate the revenue at the end of April 16.
$$ Revenue\;=\;\frac { 36\;days }{ 60\;days }\;×\;\$64,000\;=\;\$38,400 $$
The total duration of the project is 60 working days (12 weeks). By the end of April 16, 36 days will have passed. 36 days is 40% of the project timeline (36/60*100%=40%). The recognized revenue by the end of April 16 will be $64,000×40% = $25,200.
Completion based revenue recognition chart
This tool is often applied when a time and material project has limited hours. In such a situation, it is better to treat the project as having a fixed price but with a different kind of revenue recognition: completion based. In that case, the project manager specifies the project budget in hours and revenue, recognized according to billable hours tracked unless total tracked hours quantity more than the budget, after which all tracked hours are counted as non-billable.
Metric.ai interface, project budget, revenue recognition based on completion
Metric.ai interface, project budget, revenue recognition based on completion

Example of completion based revenue recognition

The agency signed an agreement for a project for $87,000, with 50% prepayment and 50% post payment after complete project delivery. The project is estimated for 725 hours.
Let's calculate revenue after 240 hours of work delivered.
$$ Revenue\;=\;\frac { 240 }{ 725 }\;×\;\$87,000\;=\;\$28,800 $$
After completing the job in 240 billable hours for 725 hours project recognized revenue would be $28,000, even if the agency already has $43,500, which is the 50% prepayment of $87,000.
Manual revenue recognition chart
Big projects are usually split into iterations, which is good both for the client and the agency. Each side of the contract is secured. The agency gets paid when the project part is delivered. A client pays for what he gets. The project budget can grow, and the stages add up. This case requires manual budget recognition by defining the percentage of completion or the amount of money for specific dates.
Metric.ai interface, project budget, revenue recognition made manually
Metric.ai interface, project budget, revenue recognition made manually

Example of manual revenue recognition

The agency signed an agreement for a $136,000 project. It consists of 5 stages:
  1. Discovery
  2. Prototype
  3. Visual design
  4. Development
  5. QA and launch
Payments do not bind to the stages and are split into stages, such as 30% prepayment, 30% after the alpha version is done (closer to the end of development stage), and 30% after project is launched. How will the agency recognize revenue after the visual design stage is finished and accepted by the customer?

The agency decided to record revenue as follows:
  1. After the discovery stage is done, the agency recorded 10% of the total project cost
  2. Prototype delivery is another 10% of the project
  3. Visual design is worth 20% of the project
  4. Development is 40% by itself
  5. QA and launching compose the last 20% of the project

After the visual design stage is done, the agency will record 40% of the total project revenue, which is $54,400, while the actual cash received is $40,800 (30% from $136,000).
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