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How much is deferred revenue costing your business?

Deferred revenue is payments received by a business in advance of delivering the goods or services to the customer. The deferred revenue balance under IFRS 15 is only adjusted from a liability in the balance sheet to sales in the income statement or P&L once each service is fully delivered. 

It’s time-consuming and costly to manually calculate and allocate revenue over annual or even quarterly contracts.  Research suggests UK Small and Medium Businesses (SMB) could save £17,000 per year in switching to digital. 

This article firstly considers deferred revenue examples, followed by a review of why businesses should automate revenue recognition to boost productivity and significantly save time.

Why is deferred revenue or accrued revenue important to your business?

Businesses across various industries receive payments in advance. Common deferred income examples include prepaid rent, legal retainers, and subscription services where customers pay upfront, such as annual invoices for memberships.

Companies can also be paid after a service is delivered.  In cases where this spans several months, the company has accrued revenue which should be recognised even before the invoice is issued. 

Many SAAS companies either issue invoices upfront, say at the start of an annual contract, creating deferred revenue,  or at the end of an annual or quarterly contract, creating accrued revenue. 

Under IFRS and GAAP Accounting Standards, recognising revenue as the service is performed is important.  Correct revenue recognition also helps companies understand their profitability.

How can deferred revenue slow down your business?

Like most, you’ve probably experienced the stress and anxiety of inefficient accounting processes centred on disjointed spreadsheets, emails, and confusing procedures for multiple standalone systems. Manual workflows to calculate and record journal entries for deferred revenue at period close result in delayed data availability and higher error rates requiring further rework. 

A 2018 study found the daily routine of sales reps was burdened by administrative tasks like data entry and filing, to such an extent that only one-third of their time was actually spent selling to customers. 

By automating repetitive tasks, like the journal entries to record and recognise deferred income, your business can boost productivity by increasing data accuracy and transparency while also reducing administrative burden.

What is the impact of 2 lost days a month?

We all know time is money. So, how much money is saved by automating deferred revenue? An analysis of SMB in the UK found replacing manual accounting procedures with digital technologies, such as to automate deferred revenue recognition, could save 27.6 days per year on average. This equates to an average of 2.3 days per month and potentially thousands of dollars unnecessarily spent on inefficient accounting processes.

Benefits of automating with ScaleXP

How can I improve the deferred revenue reporting process?

It’s essential to account for deferred and accrued revenue recognition on an ongoing basis to accurately understand sales and profitability. 

Automating deferred revenue, using software, such as ScaleXP, will save time and reduce errors. You can learn more about here.

Cloud based software allows you to share financial information amongst team members and departments.  The sales team can see and understand how much customers spend.  Contract renewals are tracked and easily available.  Further, ScaleXP displays vital KPIs on client retention rates, enabling sales reps and customer experience teams to make data-driven decisions using accurate real time data.

ScaleXP MRR, ARR, CAC, LTV

How can I save time on calculating deferred income?

ScaleXP automates deferred and accrued revenue.  The system can automatically identify and spread annual or quarter invoices by month, evenly allocating and recognising revenue when earned. 

ScaleXP invoice line description

Data is automatically refreshed daily, providing a real-world view of the health and status of your business in easily understandable and IFRS-compliant formats.

ScaleXP IFRS, GAAP, IFRS 15, ASC 606

We connect to Xero, QuickBooks, Sage, NetSuite and many more to automate deferred revenue. 

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(Read more about Deferred revenue here.)

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