Full Sail Partners Blog | Accounting (11)

Revenue Recognition, WIP, Work in Progress Blog The timing of when you recognize revenue for your business can be influenced by a number of factors. In normal day-to-day business, most firms use a revenue generation model that recognizes revenue on an accrual basis – revenue hits the books and project reporting when clients are billed for services rendered. For tax purposes, revenue is not generally recognized until the client pays for the services rendered (cash-basis accounting).

In addition to standard accrual and cash basis recognition of revenue, many firms are interested in recognizing revenue at the time services are performed. That revenue is then tracked on the project and financial statement as either unbilled or billed revenue. This article will focus on those revenue methods that recognize the value of your qualified Work In Progress (WIP), as unbilled revenue. Additionally, the methods described, will allow unbilled revenue to be reported on project reports and on your financial statements.

A word of caution! Before changing your method of revenue recognition, you should meet with your tax professional to discuss the requirements for your firm and discuss industry standard revenue recognition methods to determine right method for your firm. Also, you will want to meet with the owners of the firm, as well as, the project and divisional managers to discuss their requirements for financial and project reporting in regards to recognizing unbilled revenue.

Enabling Revenue Generation

As revenue generation posts revenue to your financial statements, you will need to create at least two general ledger accounts:

Unbilled Services (asset – balance sheet)
Unbilled Revenue (revenue – income statement)

The unbilled services account will carry the job-to-date unbilled revenue amount for your projects. The balance in this account will be carried over from one fiscal year to the next. The unbilled revenue account will carry the year-to-date unbilled revenue amount for your projects and the balance will be cleared to retained earnings at the end of each fiscal year. At all times you should be able to balance the detail on your projects to the balances in your GL accounts. This is called file reconciliation and it is very important that you reconcile these balances on an on-going basis. When performed properly, revenue generation will never cause a file reconciliation issue.

In addition to the general ledger accounts, you will need to establish and setup revenue methods to be used in the revenue generation process. These revenue methods will be specified at the lowest level of your project setup so that the work performed on those project levels can be recognized as revenue. We will be using two revenue methods in this discussion:

Method “W”, which calculates Total Revenue as Job-to-Date (JTD) Billed plus WIP at billing rates
Method “B”, which calculates total revenue as JTD Billed

Note: the Revenue Generation Method is used to calculate Total Revenue. Billed Revenue is then subtracted from Total Revenue to calculate Unbilled Revenue.

To determine which revenue method to use, this decision should be made on a project by project and phase by phase basis. You will only want to recognize revenue on those projects and phases where you expect to be able to bill and collect on your work effort. Also, you may need to set limits on your revenue generation methods so that revenue is not calculated above and beyond your contractual limits with the client. In some cases, Method W might be used on one or more phases in a project and Method B is used on other phases within the same project. Additionally, the method used may need to be changed as a project reaches a fully billed status.

Running Revenue Generation

The following should be completed, before running and managing revenue generation:

Determine your revenue methods
Create your GL accounts
Create your revenue methods
Setup these revenue methods in your projects

We recommend starting with a small sample of projects, testing your revenue generation methods, and procedures on these projects before expanding to all billable projects. Keep in mind that you can use Method “B” on some projects, which will keep them on an “Accrual” basis where revenue = billed.

Part of the management of Revenue Generation is the creation of good reports to check your “baseline” prior to generating revenue. Then check the reports again after generation of revenue and after billing. A report should be created showing the Contract Amount, Billed Revenue, Unbilled Revenue and Total Revenue at a minimum. This report can be run at the project level to verify overall amounts and/or at the phase level to verify individual phase level amounts.

Revenue Generation should be run at the following times and for the following reasons:

Each week after posting time and expense | Ensures revenue is generated and can be viewed on reports
Month end, prior to billing | Verifies the total of unbilled revenue for the month can be viewed
Immediately after billing | Confirm billed and written-off amounts are properly recorded and unbilled revenue is verified as total revenue less billed revenue

Verifying and Managing Revenue Generation

As mentioned above, Revenue Generation should be run following billing and the unbilled revenue. The remaining unbilled on reports should be compared to the general ledger balance (in the Unbilled Services asset account) and to unbilled detail and summary reports. If there are any projects where the unbilled amount does not seem right, run a project detail report to see all individual transactions and billing statuses to determine where the discrepancy might be.

One action that might cause unbilled to be different than expected would be where you process a fee based invoice for less than the unbilled amount of labor and do not put any of the labor on hold prior to billing. In this type of situation, you might bill $5,000 on $6,000 worth of labor and expect there to be $1,000 of WIP remaining. However, if you processed the invoice without putting any of the labor on hold first, then all $6,000 of labor would be cleared as having been billed against the $5,000 fee and you would not have any WIP remaining.

Another item to keep in mind is that the billing process does not have any effect on total revenue. The process of billing simply moves revenue from Unbilled to Billed. When using Revenue Generation, revenue is only generated when Revenue Generation is run, not at time of billing.

General Ledger effect when generating revenue:

Debit to Unbilled Services
Credit to Unbilled Revenue

General Ledger effect when running billing:

Debit to Accounts Receivable
Credit to Unbilled Services
Credit to Billed Revenue
Debit to Unbilled Revenue

To learn more about revenue recognition, join our webinar as we discuss the 9 key points to keep in mind regarding Revenue Generation.

A Cautionary Example of Using KPIs

If a Project Manager Falls Down in the Forest and No One is Around to See It, Does the Project Manger Still Get the Quarterly Bonus?

I have been giving a great deal of thought to KPIs (Key Performance Indicators) lately. One thought was about the idea of the unintended consequences of putting a “suite” of KPIs (KPIs are like potato chips, you can’t have just one. . .) in place, specifically for Project Managers.

How will their behavior change? Will measuring chargeability for their project teams cause the employees to be more utilized or cause billable project to become less profitable?

Let me throw out an example. This example is based upon a real client and provides KPI insight. The Names have been changed to protect the innocent.

Company A wanted to incentivize their project managers to produce more revenue. So, after months of discussion and planning, the partners setup revenue targets for each PM based upon past performance and a generously favorable potential revenue prediction for the next year. The Project Managers would be paid a bonus at the end of each Quarter for any Revenue they brought in over the projected target. This was very generous, and all the partners agreed that this would drive business revenues higher.

Except it didn’t happen exactly the way they wanted it to.

Here is a graph showing how their revenue was before this particular KPI was put in place:

And here is the before and after picture:

Ouch!

This of course caused their accounting team to load up on antacids for most of the year. Their KPI (and bonus program based on that KPI) had encouraged some behavior that was not necessarily good. The Project Managers did not care about recognizing any revenue (and by extension, billing the client) until the end of the quarter, and when they did, they typically over-recognized and over-billed.

This problem caused a cascade through-out the organization. Clients noticed and started to question why this month’s bill was so much larger that last month’s. Average AR started to go up. Cash flow went down. Lines of credit had to be accessed to make payroll (and pay the quarterly bonus).

How could this have been prevented? Looking back, it is obvious right? But at the time, this sounded like a great idea and everyone was committed to making it successful.

Too much focus on one KPI is not a good thing. They should have used several measurements that touched upon AR, Chargeability, and (Project Managers cover your ears!), Client Satisfaction.
Quantitative measurements are great, but we also need some Qualitative measurements in the mix.
Involve many different types of people in your KPI development. Someone might have pointed out this scenario at the beginning if the partners had not developed this on their own.

Which brings me to my final point... KPIs only help if you review them frequently and action is taken based upon them. A well designed KPI exists to measure performance and if adjustments are not made based upon them...then no one saw the Project Manager fall in the forest.

View webinar on KPI Insight for Project Managers.

Deltek Vision Mobile Timesheet Did you know you can enter your time into Deltek Vision from your iPhone or iPad? I don’t know anyone that gets excited about filling in their timesheet, but the Deltek Vision Timesheet app allows me the ability to access my timesheet no matter where I am. For users that travel or are away from the office, it allows a convenient method to update your time on the fly. Sorry, no more excuses for those on the road.

To set up the app, I searched “Deltek” from my iPhone app. I clicked install and obtained my server name from my IT person to sync to my Deltek Vision database. The installation was simple. The added security of a 4-digit pin also provides secure access to the app. There is no syncing between my desktop and my phone. The information is automatically updated in real-time.

It’s easy to add a project to my timesheet and the favorite feature allows me to keep my frequently used projects. The project did, of course, have to be active and approved for use in processing. With the iPhone 4s, I’m able to use the voice-to-text feature to speak my timesheet comments. A very helpful feature when your drinking your morning coffee.

Kudos to Deltek for this free, user-friendly app. Now I can access my timesheet anywhere, anytime.

To check out more features and compatibility requirements, visit iTunes: http://bit.ly/Ki93E6.

Deltek Vision iPhone Timesheet App Deltek Vision Mobile iPhone Timesheet App