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Ruddr helps you keep track of both earned revenue and invoiced revenue. While these may sound like the same thing (after all, isn’t all revenue earned?), they are not. It is important to understand the difference between earned and invoiced revenue because of the impact to performance metrics and financial reports. To view revenue-related information in Ruddr, you must have project-level View revenue permissions on your security role. Invoiced Revenue Invoiced revenue is exactly what it sounds like - it is the revenue that has been invoiced to clients. Those clients may not yet have paid those invoices, but the fees count as invoiced revenue, nonetheless. If an invoice shows 1,000 hours at a bill rate of $100 for a given month, you will have $100,000 in invoiced revenue for that month. Earned Revenue Earned revenue is a slightly more nuanced concept that depends on the billing type of the project. For time and materials (“T&M”) projects, earned revenue and invoiced revenue are the same for a period of time, assuming the invoice has been created. Since a T&M invoice reflects the hours worked in a timeframe, the earned and invoiced revenue are identical for that period (once the invoice has been created). But, for fixed fee projects, the earned revenue is often different than the invoiced revenue. This is best illustrated through an example.

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Calculating Earned Revenue

Assume that you sign a contract with a new client to deliver a $100,000 fixed fee project. You have negotiated a billing structure whereby the client pays $50,000 at contract signing and $50,000 after the successful completion of the project. Also assume that the contract is signed on January 1st and the client pays the first $50,000 invoice that day. Your team is really busy and cannot start the project until February 1st. The project is then completed over the next four months with 25% of the work being delivered each month. At the end of May, when the project is done, you invoice the final $50,000. In terms of invoiced revenue, you have $50,000 in January and $50,000 in May. There is no invoiced revenue in February, March, or April. But, to calculate the earned revenue, we must consider when the work was delivered, not when it was invoiced. Since 25% of the work was delivered each month starting in February, the earned revenue on the project would be $25,000 in February, $25,000 in March, $25,000 in April, and $25,000 in May. It is important to realize that your earned revenue is disconnected from your invoiced revenue. The earned revenue is better aligned with the actual delivery of the services. In the example above, through the end of April, you have earned a total of $75,000 even though only $50,000 has been invoiced. It is possible to have more (or less) earned revenue at a point in time than you have actually invoiced.

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The Importance of Earned Revenue in Ruddr

Ruddr relies on earned revenue to calculate several key operational metrics. For example, the effective bill rate and services margin for a project are calculated by using earned revenue. By using earned revenue, Ruddr can provide a more accurate point-in-time representation of these metrics. Continuing with the sample project outlined above, we will look at the effective bill rate at the end of February using both invoiced revenue and earned revenue. If the project team had worked 250 total hours by the end of February, the effective bill rate using invoiced revenue would be the $50,000 invoiced in January divided by 250 hours worked in February, which yields a $200 per hour effective rate. To calculate the effective rate properly, we must use the percentage of the project that was completed in February. Since the project team worked 250 hours during the month out of the total 1,000 estimated hours, 25% of the project was completed in February. Thus, the team has earned 25% of the $100,000 total budget, which is $25,000. The effective bill rate using earned revenue would be $25,000 divided by 250 hours which yields a $100 per hour effective rate. This example illustrates the importance of utilizing earned revenue when gauging professional services performance. If a firm does a considerable amount of fixed fee projects, earned revenue is the superior way to effectively evaluate the operational performance of both the projects and the firm.

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How Ruddr Calculates Earned Revenue

For T&M projects, earned revenue is essentially the hours that have been worked on the project. Thus, the earned revenue can change every hour of every day, assuming time is being recorded in Ruddr. For fixed fee projects though, Ruddr calculates earned revenue using one of its fixed fee revenue recognition methods. These methods allow for revenue to be recognized at a specific point in time.

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Project Budgets must be Updated Regularly

It is important that a project’s budget is regularly updated during the delivery of a project. If the original budget of a fixed fee project is no longer realistic, the project’s earned revenue and corresponding metrics will be wrong until the budget is fixed. It is a best practice to update each project budget at least once per month. For the most accurate understanding of a project’s budget, it is recommended that the project be broken down into individual tasks in Ruddr. Each task is assigned an hours estimate and the project manager can then track the progress against each task’s estimate. By breaking down a large effort into its constituent tasks, it is much easier to manage the project and to proactively spot potential trouble. A project’s budget in Ruddr can be set to automatically aggregate from the project tasks. This means that the project manager simply needs to keep the task hour estimates updated and the overall project budget will be maintained automatically.

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Revenue Reporting

Ruddr provides financial performance reports that allow you to quickly evaluate the key financial metrics over any period of time. These metrics include earned revenue, cost, profit, margin, realization rate, and effective bill rate. These financial reports can be used by the company’s accounting team to determine how much revenue should be recognized on the company’s financial statements for a given period. While a full discussion of revenue recognition standards is beyond the scope of this help article, the Financial Accounting Standards Board (FASB) provides in-depth information on its website.