Revenue Management: #4 What if there are uncertainties in project or service delivery?
Our previous post taught us how Zoho Billing makes life easy for businesses with its automated revenue recognition rule. However, certain businesses have more challenges that an automated system cannot handle, and there are certain situations where automated revenue recognition is not feasible. For example, construction services paid in advance but with uncertain start dates can make the revenue recognition rule look inappropriate. Some manual interventions are needed to handle this scenario.
Manual revenue recognition in Zoho Billing helps you handle these uncertainties. It is used when the timing and amount of revenue cannot be determined accurately through automated rules. This is common in industries such as construction, where project completion is tied to milestones that may occur at irregular intervals.
Example 1:
Imagine a construction firm signs a $50,000 contract to renovate a commercial building. The client pays the entire amount upfront, but the agreement specifies that the revenue will be recognized only as key project stages are completed. Each milestone carries a defined value or percentage of the total contact, say,
Design & Approval Phase: $5000
Demolition & Site Preparation: 30% of the total contract value
Structural & Roofing Work: 40% of the total contract value
Interiors & Handover: 100% of the remaining
Milestone | Recognition | Completion Date | Amount Recognized |
Design & Approval | Fixed Cost | 12/Jan/2025 | $5000 |
Demolition & Site Preparation | 30% of the total contract | 20/Feb/2025 | $15,000 |
Structural & Roofing Work | 40% of the total contract | 25/Apr/2025 | $20,000 |
Interior & Handover | 100% of the balance | 30/Jun/2025 | $10,000 |
Total Revenue Recognized= $50,000 | |||
The company ensures that its financial statement accurately reflects real project progress by only reporting revenue when each phase is completed, rather than relying on an automated schedule that may not match the actual work done.
If you look at the revenue recognition report, it will show up like this,
i) Recognized Revenue Report
At the end of the project,
Month | Recognized Revenue |
Jan 2025 | $5000 |
Feb 2025 | $15,000 |
Mar 2025 | $0 |
Apr 2025 | $20,000 |
May 2025 | $0 |
Jun 2025 | $10,000 |
Total Recognized | $50,000 |
ii) Deferred Revenue Report
As the project progresses, deferred value gets recognized.
Month | Deferred Revenue |
Jan 2025 | $45,000 |
Feb 2025 | $30,000 |
Mar 2025 | $30,000 |
Apr 2025 | $10,000 |
May 2025 | $10,000 |
Jun 2025 | $0 |
iii) Revenue Waterfall Report
Billing Date | Total Billed | Jan 2025 | Feb 2025 | Mar 2025 | Apr 2025 | May 2025 | Jun 2025 | Recognized Revenue | Deferred Revenue |
Jan 2025 | $50,000 | $5,000 | $15,000 | $0 | $20,000 | $0 | $10,000 | $50,000 | $0 |
The project owner ensures that revenue is recorded accurately only after each milestone is completed, and this is done manually without any specific frequency.
Example 2:
A software consulting firm signs a $120,000 contract to implement an in-house ERP solution with a client. The client pays the amount upfront, but the project involves phases that don't follow uniform timelines/deadlines.
The defined timelines are,
Requirement Analysis & Resource Planning: $10,000
System Customization: 25% of the total contract
Testing & QA: 35% of total contract
Deployment & Support: Remaining contract value
Milestone | Recognition | Completion Date | Amount Recognized |
Requirement Analysis & Planning | Fixed Cost | 15/Jan/2025 | $10,000 |
System Customization | 25% of the contract value | 10/Mar/2025 | $30,000 |
Testing & QA | 35% of the contact value | 25/May/2025 | $42,000 |
Deployment & Support | 100% of the balance | 30/Jul/2025 | $38,000 |
Total Revenue Recognized= $120,000 | |||
When you look at the revenue recognition report for this software deployment, it will show up as follows,
i) Recognized Revenue Report
At the end of the deployment,
Month | Recognized Revenue |
Jan 2025 | $10,000 |
Feb 2025 | $0 |
Mar 2025 | $30,000 |
Apr 2025 | $0 |
May 2025 | $42,000 |
Jun 2025 | $0 |
Jul 2025 | $38,000 |
Total Recognized | $120,000 |
ii) Deferred Revenue Report
As the development progresses, deferred value gets recognized.
Month | Deferred Revenue |
Jan 2025 | $110,000 |
Feb 2025 | $110,000 |
Mar 2025 | $80,000 |
Apr 2025 | $0 |
May 2025 | $38,000 |
Jun 2025 | $38,000 |
Jul 2025 | $0 |
iii) Revenue Waterfall Report
Billing Date | Total Billed | Jan 2025 | Feb 2025 | Mar 2025 | Apr 2025 | May 2025 | Jun 2025 | Jul 2025 | Recognized Revenue | Deferred Revenue |
Jan 2025 | $120,000 | $10,000 | $0 | $30,000 | $0 | $42,000 | $0 | $38,000 | $120,000 | $0 |
Manual revenue recognition is critical when automated rules don't serve the purpose. As we saw through construction and IT consulting examples, Zoho Billing allows businesses to recognize revenue at the right amount and time, ensuring financial statements remain aligned with real project progress.
While we learn the manual recognition process, we will explore these specific industry types in future posts and provide a detailed walk-through of how these businesses record their earnings.
Our next post will start with the SaaS industry, where revenue recognition follows a very different pattern. Unlike milestone-based revenue recognition, SaaS depends more on a recurring billing cycle.
Stay tuned as we explore revenue recognition for SaaS businesses in a few days.
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