Understanding and using Revenue Recognition

With Forecast's Revenue Recognition feature, you can recognize revenue for Fixed Price projects at the project level on a monthly basis using the "percentage complete" method. In turn, project revenue recognition numbers can then be rolled up to a company level, giving customers an accurate month-by-month revenue report.

Thanks to this functionality, you are able to see how the monthly revenue has been distributed between the tasks for which time was entered that month. It also provides a macro-level understanding of how the total revenue is distributed across tasks, and in turn phases and roles.

This article covers:

• Understanding Revenue Recognition
• Accessing the Revenue Recognition page
• Reviewing the Revenue Recognition page
• Managing your Revenue Recognition accounting period

Understanding Revenue Recognition

Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized. The revenue recognition principle, using accrual accounting, requires that revenues are recognized when realized and earned, not when cash is received. 

For example, If you finish 60% of your project - your recognized revenue will be based on that 60%. This means that if you increase or decrease the scope later, your previously recognized revenue won't be overwritten, however the increase or decrease will affect the future revenue recognitions. In order to assess the % complete, the project must be planned out fully to the end so it can be assessed in terms of completeness. 

Another detailed example:

• You have a fixed budget for the project set to $100,000
• Forecast billable Time & Materials time at completion is $120,000
• Actual billable Time & Materials time to date is $60,000

Terminology

Accessing the Revenue Recognition page

In Forecast you can recognize revenue on all projects budget types by heading to your project’s Budget Details tab, however Fixed Price projects are provided with a separate and detailed overview of revenue recognition.

To access Revenue Recognition (Fixed Price Projects)

1. Open your project from the Projects tab.
2. Click on the Budget tab. 
3. Select the Revenue Recognition tab.

Reviewing your Revenue Recognition

Fixed price projects are provided with a detailed overview of Revenue Recognition, which is divided into three main categories. This screen shows the fixed price, and how the budget breaks down into 2 main “buckets” - time and expenses.  For the time budget, Forecast will also suggest how revenue could be recognised across the months based on how the system is suggesting revenue could be recognised across the months. For more information on the calculation and process, please hover on the tooltips:

1. Revenue Recognition: This section covers an overall summary of the revenue recognised for the project you are viewing, including:
   • Total Revenue Recognition
   • Time
   • Expenses
   • All Costs
   • Estimated profit
   • Estimated profit (%)
2. Time Revenue recognition: This section provides an overview of the time recognized for the project in question, including:
   • Time budget:  Forecast uses the cumulative % complete method whereby the system takes the billable time for the month and divides it by the total billable time at completion.  This provides us with an estimated percentage complete which is then applied to the fixed price.  The monthly suggested revenue is then derived from the incremental difference between the months.
   • Time cumulative % complete: which includes cumulative estimated % complete of time budget (burn-up) and cumulative spend of time budget (burn-up)
   • Time revenue recognition:  provides an overview of monthly time revenue recognition, monthly complete in percentage, estimated profit (also in percentage value). In addition you can review your billable time as cumulative, by month, the estimated profit
3. Expense revenue recognition: This section covers an overview of the expenses recognized for the project in question, specifically:
   • Expenses budget: All expenses that are submitted on the project are taken into revenue as is. Therefore, because the expenses budget is “as is”, the time budget therefore needs to be flexible.  Calculation is: Fixed price budget - expenses budget = time budget
   • Expenses cumulative % complete: this section covers the following
     • Cumulative estimated % complete of expenses (burn-up): This is the incremental % complete of the expenses budget. Calculation is: Accumulated monthly billable expenses  / Total billable expenses 
     • Cumulative spend of time budget (burn-up): This is the incremental spend of the capped budget based on the % complete of the project. Calculation is: Monthly cumulative estimated % complete of expenses x Total billable expenses
   • Expense revenue recognition: This covers the revenue that the system is suggesting should be recognised for the month for expenses. It is the sum of all expenses submitted in the month, the percentage of expenses complete, estimated profit (also in percentage)
   • Expense costs: This section provides the overview of the costs associated with the expenses submitted for the project on a monthly basis. 

Managing your Revenue Recognition accounting period

In Forecast you have the ability to manage your accounting period for projects with revenue recognised. Closing a month ensures that the revenue for that month will be recognized and it will not spill over into the following months.  We suggest as part of your monthly process to lock the revenue.  By doing this, the revenue recognition for that month in the Revenue Recognition tab and Details tab  will not be updated anymore (and will be grayed out), enabling the future months to re-calibrate based on the remaining time budget (yet to be recognised).

To lock the revenue:

1. Open on your project.
2. Click on Budget tab.
3. Select Revenue Recognition tab.
4. Click on the three-dots icon next to Revenue Recognition modal.
5. Select one of the following:
1. Open month: if you start recognizing revenue in the current month.
2. Close month: if you are closing the month to recognize revenue for the current month.