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Revenue Recognition For Services Billed Upfront

Hi, We are currently in the process of changing our business model that directly affects our month-end billing process. Our previous model was billing in arrears on a per-transaction basis. We have now switched to a flat monthly fee billed upfront for services rendered. Our month-end bills are generated and dated on the last day of the month for both per-transactions and monthly services. The per-transaction customers' bills correspond to the month that the revenue is recognized and the monthly service customers' revenue is recognized a month ahead (ie, March service is billed & recognized on Feb 28). Do we need to start accounting for the monthly services that are billed ahead in a deferred revenue account and recognizing in next month? Or simply just push the date forward a day?

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

The quick answer is yes....deferred revenue. Should you not be doing TWO bills on Feb 29th? One for February (in arrears) and one for March (in advance)?

One important thing to point out is the capability of your existing system to accommodate the deferred nature of the revenue. So it wont be a question of when you billed it, but more for what period is the customer paying for. You are not "tethered" or dependent on a billing cycle.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Agreed, you can do either. If invoice is dated Feb 28 you need to defer. Easier to just date the invoice March 1. Either is fine.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon
1. Do your clients want/prefer one invoice or two?
2. How flexible is your accounting software? Does it have a rev rec module that can manage this for you automatically? How do you treat credits/refunds/adjustments?
3. If you bill per transaction (usage?) in arrears, don't you have to accrue it at month end if it is unbilled at that time? Do customers have specific cycle dates for transaction billing or do you have a standard cycle (e.g. 1st to last day of each month is billed last day, OR, 16th of month to 15th of next month, etc.).

In short what are your revenue management requirements overall?

Gary Honig
Title: President
Company: Creative Capital Associates Factoring Co..
LinkedIn Profile
(President, Creative Capital Associates Factoring Company) |

Something to think about; this form of invoicing is known as "pre-billing." Meaning the customer is billed before the service is offered. Should there be a dispute with a customer your position will be different had they already received the service.

If you are going to be considering commercial financing in the future, and are planning on using your accounts receivable as collateral - pre-billed invoices would be considered not eligible as far as a borrowing base. Lenders will not lend against pre-billed invoices.

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