With Time and Materials engagements, reports and dashboards in Ruddr show revenue as the hours are worked. Note that you can only see revenue in Ruddr if your security role has the permission to view revenue. In that scenario, if a project team works 10 hours today on a billable project, the revenue associated with those billable hours will be immediately reflected on reports. With fixed fee projects, however, revenue is recognized in Ruddr at specific points in time and not in a continuous fashion.
Why is Revenue Recognition Important?
Revenue recognition for fixed fee projects is important because it aligns the revenue with the work that is delivered. As an example, assume that you sell a $100,000 project and agree to invoice 50% up front and the final 50% one month after the project is completed. In this scenario, you invoice the client for $50,000 today, even though you can not start the project until next month. Then, you invoice the final 50% one month after the project is fully delivered. If you recognize revenue as it is invoiced, your income statement for the company will show $50,000 in two months in which your team did none of the project work and will therefore show $0 in revenue during the months when all of the work was completed.
Without a proper revenue recognition approach, the revenue and profit figures for the firm tend to swing wildly from one month to the next. Since revenue is not aligned to the work that is being delivered, it becomes disconnected from other key performance indicators such as billable utilization rate and effective bill rate. While smaller companies can get by without a formal, revenue recognition process, it is difficult to effectively manage a larger organization without one.
Brief Background on Accounting Standards
The Financial Accounting Standards Board’s (FASB) most recent revenue recognition standard, ASC 606, outlines how companies should recognize revenue from customer contracts. ASC 606 is lengthy and most small-to-midsized professional services organizations are better served by following the AICPA's Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). The FRF for SMEs is an alternative to accounting principles generally accepted in the U.S. (GAAP) with the goal of making it easier for privately owned businesses to prepare their financial statements. For services firms that are not publicly traded (and do not intend to become publicly traded), FRF for SMEs is likely a better choice than ASC 606. FRF for SMEs stipulates that revenue should be recognized using a percent complete method.
Revenue Recognition Methods in Ruddr
Revenue can be recognized in Ruddr using one of two methods. These methods are:
The workspace default method for project revenue recognition can be set within the Project Settings section (Figure 1) of workspace settings. This setting can be overridden for each project up until the point when an invoice is generated for the project.
Figure 1 - Specify the Default Project Revenue Recognition Method in Workspace Settings
As Invoiced
With the As Invoiced method, revenue is recognized at the time it is published on an invoice. This effectively means that no formal revenue recognition method is in place. This approach can work fine for small companies that invoice their fixed fee projects on a monthly basis. But, if a company does not invoice monthly or if they do invoice a significant percentage of the project up front or at the end of the project, then the As Invoiced method is not recommended.
Manual
With the Manual method, revenue is recognized per manual entries on a revenue recognition ledger. The revenue recognition ledger (Figure 2) exists on the Accounting tab of the Edit Project drawer. The manual method provides you with complete control over the frequency of revenue recognition as well as the amounts of each recognition entry. For larger companies that use an external revenue recognition process, the manual method is ideal because it provides complete control over revenue recognition.
Figure 2 - Manual Revenue Recognition Ledger
The final total of manual entries in the revenue recognition ledger should equal the total of the fixed fee billing schedule found on the Billing tab of the Edit Project drawer. The billing schedule controls when you will invoice the customer while the revenue recognition ledger controls when you will recognize the revenue for the project.
Automatic (coming soon)
The Automatic revenue recognition method allows Ruddr to create entries in the revenue recognition ledger automatically on a weekly or monthly basis. In order for Ruddr to recognize revenue automatically, the project must have an hours budget. Without a summary or detailed hours budget, it is impossible for Ruddr to automatically recognize revenue.
Once a revenue recognition entry has been automatically added to the ledger, it can then be modified or removed, just like a manual revenue recognition entry. You still have full control over the revenue recognition ledger.
Completing a Fixed Fee Project
When a fixed project that uses either the "Manual" or "Automatic" revenue recognition method is set to Completed, Ruddr will check to see if all of the project's revenue has been recognized. If there is revenue that has yet to be recognized, Ruddr will ask the user if they would like to recognize that remaining revenue. If the user confirms this action, a final row will be added to the revenue recognition ledger to recognize that revenue.