The Revenue Recognition Ledger

With Time & Materials projects, revenue is recognized on reports and dashboards as of the date of each billable time entry. But, with Fixed Fee projects, revenue is recognized based on the fixed fee revenue recognition method set for each project. The revenue recognition method options available for fixed fee projects include:

• As Invoiced
• Manual
• Automated - Percentage of Billable Hours
• Automated - Percentage of Time & Materials Revenue
• Automated - Percentage of Services Cost

A detailed discussion of each of these methods is included in the Fixed Fee Revenue Recognition article. The “As Invoiced” method recognizes revenue as of the Issue Date of the published invoice that includes one or more billing schedule items. The other four revenue recognition methods recognize revenue based on entries in the Revenue Recognition Ledger in the Accounting section of the project’s Settings tab. The revenue recognition ledger (Figure 1) tells Ruddr when to recognize revenue and how much revenue to recognize. Note that projects using the “As Invoiced” revenue recognition method do not show this ledger. It is important to point out that fixed fee projects that use the revenue recognition ledger have their invoicing and revenue recognition completely separated. Invoicing is driven by the Fixed Fee Billing Schedule while revenue recognition is driven by the Revenue Recognition Ledger. This is an important concept because you may need to recognize revenue on a very different schedule than you invoice. As an example, assume that your company sells a $100,000 project and the contract states that 50% of the fee will be invoiced up front and 50% will be invoiced one month after the project is completed. In that scenario, you invoice the client $50,000 today, even though you may not start the project until next month. Then, you invoice the final 50% one month after the project has been fully delivered. If you recognize the revenue as it is invoiced, your performance reports in Ruddr will show $50,000 in two months in which your team did none of the project work. This inflates gross profit and gross margin in those two months and depresses them in the remaining months. Note that the ledger will display the total of the ledger entries and also the Budget Recognizable Revenue, which is services revenue budget plus the non-billable expenses budget. It does not include billable expenses or other items to bill. When the total of the revenue recognition ledger exceeds either the total of the fixed fee billing schedule or the budget recognizable revenue, Ruddr will display a notification warning (Figure 2) of such. Entries on the revenue recognition ledger can be added by a member or generated by Ruddr.

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Adding Revenue Recognition Ledger Entries

To add revenue recognition ledger entries yourself, click either the + button or the Add Multiple button at the top-right of the ledger. The + button will bring up a window that will allow you to create a single entry in the ledger (Figure 3). This is generally optimal when the revenue recognition will not follow a consistent pattern from month-to-month. Note that revenue recognition entries can be positive or negative. If you had previously recognized too much revenue on a project and did not want to adjust past revenue recognition entries, you could create a negative revenue recognition entry for the current month. In cases where the project will recognize the same amount of revenue over a number of months, the Add Multiple button will allow you to easily create many monthly revenue recognition entries with a single action. For projects that span several years, this bulk action can save a tremendous amount of time.

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Generating Revenue Recognition Ledger Entries

Ruddr can automatically generate past and future revenue recognition ledger entries via the Generate button at the top-right of the ledger. The Generate button is only enabled once the project’s budget can back a schedule; hovering over a disabled button will explain what is missing (for example, the project must use a budget or must have a services revenue budget) (Figure 5). The Generate button evaluates project actuals through the previous day and forecasted values from today forward to create revenue recognition entries. The button brings up the Generate Revenue Recognition window which captures four important pieces of information:

• The method Ruddr should use to calculate revenue recognition entries
• The interval that entries should be created on (weekly or monthly)
• The start date for when the process should create revenue recognition ledger entries
• The date through which Ruddr should rely on actual hours

For detailed information on how the Percentage of Billable Hours, Percentage of Time & Materials Revenue, and Percentage of Services Cost methods calculate revenue recognition ledger entries, see the the Fixed Fee Revenue Recognition article. The Generate button will create revenue recognition entries through the end of the resource allocations for the project. Thus, the ledger could contain many months of future revenue recognition entries. Those future entries are used on reports and dashboards that display forecasted services revenue.

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Automated Revenue Recognition

While adding entries yourself or generating them with the Generate button is often desirable, Ruddr also provides three automated revenue recognition methods. These methods are Automated - Percentage of Billable Hours, Automated - Percentage of Services Cost, and Automated - Percentage of Time & Materials Revenue. With these methods, Ruddr performs automated revenue recognition either once per week or once per month. Ruddr will analyze the project’s actuals and forecast and then make the appropriate entry in the revenue recognition ledger. For more on automated revenue recognition methods, see the Fixed Fee Revenue Recognition article.

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How Generated Entries Are Calculated

Each entry on the ledger is either Ruddr-generated or member-generated. Entries Ruddr creates, whether from the Generate button, an automated revenue recognition method, or recognizing the remaining revenue when a project is completed, are Ruddr-generated and are marked with a lightning bolt icon. Entries a member adds with the + or Add Multiple button, and Ruddr-generated entries where a member has edited the date or amount, are member-generated. For Ruddr-generated entries that use a percent complete, the % Complete column shows the percent complete behind the amount. Hover over the lightning bolt on a Ruddr-generated entry to see how its amount was calculated. The card shows the revenue recognition method used and when the entry was generated, then breaks the amount down:

• Percent complete - the actual values through a date, plus any planned values through the entry’s date, divided by the project’s budget or forecast. Depending on the method, these values are billable hours, Time & Materials revenue, or services cost.
• Revenue earned - the budget services revenue multiplied by the percent complete, plus non-billable expenses when they apply.
• Recognized this entry - the revenue earned minus the revenue previously recognized on the ledger.

For an entry that recognizes the remaining revenue when a project is completed, the card shows the billing schedule total minus the revenue previously recognized. Once a member edits the date or amount of a Ruddr-generated entry, it no longer shows a calculation. Editing only its notes keeps it Ruddr-generated. Every change Ruddr makes to the ledger when generating entries is recorded in the project’s history. Generating again when nothing has changed leaves the existing entries as they are.

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Completing a Fixed Fee Project

When a fixed fee project that uses the revenue recognition ledger is set to Completed, Ruddr will check whether all of the project’s scheduled revenue, the total of its fixed fee billing schedule, has been recognized. If it hasn’t, Ruddr will ask whether to add an entry for the remaining amount (Figure 7). If you click Yes, a final Ruddr-generated entry for that amount is added to the revenue recognition ledger.