What are unbilled receivables and when should you account for unbilled AR?

Updated On: December 02, 2019
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Knowing when your hard-earned cash can be counted as revenue is a vital process for subscription businesses.

Let’s say you’re in the process of switching to a new subscription billing service. During that time, you’re still billing your recurring subscription customers, but invoices are being generated late as a result of changing platforms. How do you account for that revenue on your balance sheet?

Situations like this are referred to as unbilled receivables, and they occur far too often for many SaaS companies. If you’re not careful, it can make recognizing revenue much more complex.

Understanding the underlying causes of unbillable receivables makes it easier to account for them and get a better picture of your incoming revenue.

What are unbilled receivables?

Unbilled receivables are recognized revenue that you have accounted for, but not yet sent an invoice to the customer. Basically, it refers to the idea that you’ve already provided the service to a customer but not yet billed them. Due to the nature of the subscription model, SaaS companies run into issues with unbilled receivables more often than other businesses.

Unbilled receivable

How do you account for unbilled receivables?

Include a section on your balance sheet for unbilled receivables to recognize revenue for a given period. Count unbilled receivables toward your total revenue even if an invoice has not been created.

How do unbilled receivables occur?

Unbilled receivables can be the result of a failure in the billing process or a built-in function of certain types of business relationships. Here are the three most common causes you’ll run into as a subscription company.

Invoice delays

If there is a delay in generating your invoice after a recurring billing date, any payments made during that time will count as an unbilled receivable. That is why having a reliable subscription billing management platform is so important: an invoice needs to be generated on a regular, recurring billing date.

Advanced payment

When you are paid in advance, it counts as an unbilled receivable because the invoice for the services your company provides has not yet been generated. While not as common for recurring billing companies as an invoice delay, it can occur when customers manually make a payment on their accounts.

Contractor billing

Working as an agency or contractor can result in an increase in unbilled receivables as well. In these types of relationships, revenue is typically collected when an individual project or milestone in a project is finished. Any work done before project or milestone completion is an unbilled receivable because the invoice has yet to be created.

As you can see from these examples, the underlying cause of unbilled receivables is functionally a matter of timing. When there is a disconnect between when revenue is collected and when it is invoiced, that is counted toward your unbilled receivables.

Minimizing your unbilled revenue

While there are some business relationships that tend to work regularly with unbilled receivables, minimizing those situations can provide a clearer picture of your total revenue. Here are a few strategies you can use to minimize potential issues.

Generate invoices on payment

Instead of issuing your invoice before you’ve received payment, create an invoice only after the payment has been completed. Doing so can rid your balance sheet of unbilled receivables and keep your customers and your team up to date.

Send invoices earlier

Recurring billing relationships create the potential for billing delays. If you’re running into issues with late payments causing invoices to go into arrears, one solution is to send them earlier in the billing cycle. You’ll still have to account for the time between invoice sent and payment made, but it does give more time for people to make a payment before the revenue recognition date.

Use dunning emails

When you send emails to remind customers that they need to make a payment by a certain date, it prepares them for making those payments on time. When you’re accounting for unbilled receivables on your monthly reports, it can be helpful to look at whether the cause is related to the customer or the process.

While unbilled receivables aren’t going to hurt your ability to grow, understanding how to account for these situations paints a clearer picture of how your company captures revenue over time.

Nail your revenue recognition with ProfitWell Recognized™

Unbilled receivables are essentially just a problem during the revenue recognition process. With Recognized™ from ProfitWell, you have a tool to help you spend less time making sure your balance sheets are correct, and more time analyzing your business.

Recognized example

Example of revenue recognition sheet from Recognized™.

Chat with our team today to learn how we can help you reconcile your unbilled receivables.

Tracking unbilled receivables clarifies your revenue stream

When you can accurately account for unbilled receivables, it helps you analyze how and when you obtain revenue from customers. Don’t let this confusion make it more difficult to recognize your revenue.

Tags: accounting

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