What does the revenue backlog mean?
Revenue backlog is the amount of unrecognized and uninvoiced revenue a subscription- or project-based business is scheduled to earn over the term of a service agreement. It isn’t reported on a financial statement, but companies use it to show investors and stakeholders proof of future revenue.
Most of the time, the income backlog is…
They are not written down. The number doesn’t follow GAAP, so it’s not shown on the balance sheet. It doesn’t help your bottom line, and public companies don’t need to keep a backlog. It’s up to the business to decide how to record its backlog.
They were not charged. Customers of SaaS companies will be charged every month to use their tools. Businesses on contracts send bills for work at set times, called “milestones.” You won’t include your backlog in the billing process because the value of the entire contract stays the same no matter how long it takes.
Well, you have known me for a long time. There is a running total of the money you expect to get from contracts or subscriptions over time. This is called your income backlog. It usually covers years and more than one accounting period. It doesn’t count as income until your business meets all the requirements for recognition and meets the customer’s needs.
Total contract value (TCV) is the sum of your backlog and the money you’ve already made from a deal. Investors and other important people can use TCV to determine how much your company is worth. You can use this to show why you need the money (for example, to meet performance obligations you don’t have the means for).
Like words
- Unrecognized income
- Backlog of sales
- Order delay
- Orders not yet filled
Why it’s essential to keep track of revenue backlog
Even though it’s not needed for financial reporting, keeping track of your income backlog can help you:
Learn how your company will do financially in the future.
- Set a fair revenue goal based on the contracts you expect to fulfill and the deals you expect to close. • Figure out where you might have trouble meeting your customers’ needs.
- Make better business choices, like hiring people or spending money on resources to meet demand and keep contracts on time.
If you’re pitching to investors, it also speaks to your financial responsibility and long-term promise. A healthy backlog shows that your business has a solid foundation for future growth and revenue.
Backlog of Revenue vs. Deferred Revenue
A revenue backlog is not the same thing as suspended revenue. Many people get mixed up because both mean the company hasn’t made any money yet.
Revenue backlog is money that hasn’t been made or paid for yet, while deferred revenue is already paid for a product or service.
On the balance sheet, deferred income is a current liability since the business has already paid for it. The revenue backlog is an internal financial measure that does not affect the balance sheet.
When compared to sales backlog, deferred revenue is inconsistent and hard to predict. It goes up and down based on when and how you bill your clients. As your contract ends, the backlog slowly goes away.
A backlog can be thought of as money that is still to be paid. It’s on the way but not in your account yet. And it will only go into your account if you meet your responsibilities to the customer.
In this way, deferred income is the opposite—you already have the money; all you have to do is keep your end of the deal.
For example, you sell SaaS and have just signed a new customer for $100,000 for one year. That $100,000 goes into your backlog if you haven’t already charged them for the subscription deal. The $50,000 they paid you up front for the job would go into your backlog, and the $50,000 they sent you would be deferred revenue.
How to Figure Out Your Revenue Backlog
It’s easy to figure out the income backlog:
Revenue Backlog = Total Contract Value (TCV) – Amount Paid
When you figure out your backlog of income, you include the money that customers have agreed to pay but haven’t yet because their contract is still active. When the company does what it agreed to do, like giving the customer access to its platform or finishing a job, it sends a payment and records the money it gets. The delay goes down each time this happens.
In short, your backlog can include • active subscriptions • committed or contracted income that hasn’t been recognized yet because the customer hasn’t met the acceptance criteria.
A service offering that isn’t finished
- Future services for implementation, training, and advice
- Subscriptions on hold or going through
The value of investments in the future
It is best to add things to your backlog if there is strong evidence that you and the customer will meet your obligations. This will give you a more accurate picture of your company’s financial health and future revenue performance.
How the backlog of revenue affects the financial health of a SaaS
There are times when a backlog can be good for your business and times when it can be harmful.
On the one hand, a big backlog can show buyers that your business is in high demand. It can also help you keep track of your money and make plans for growth in the future.
A significant backlog could also mean that you can’t meet your responsibilities on time, you’re having trouble keeping customers, or your internal processes aren’t working well.
SaaS businesses need to keep an eye on their revenue backlog because they use a subscription model, which creates a backlog. It doesn’t change your financial reports, but it does change the direction of your business, the people who might invest in it, and other important people.
For instance, with the work you already have on hand, will you be able to meet your income goals this quarter? Do you need more resources to keep your customers happy and meet your obligations? Or do you need to make a lot more sales to go with it? If so, do you have the right tools to back it up?
Keeping an eye on the backlog can help you figure out what’s wrong with delivering products or services, billing or collecting payments, and ensuring customers are happy. It can also help you make a good income prediction, which you can use to decide where to spend your money.
Reasons for a Backlog in Revenue
Contracts for a long time
Contract-based businesses in SaaS and B2B manufacturing will always have money coming in but not going out. As soon as they agree on a price with a new customer, the deal’s total value goes on the books, creating a backlog.
Low ability to make or deliver
As you get more new customers, your backlog may start to grow. If this happens, keep a close eye on your shipping times, ability to meet deadlines, and customer satisfaction. You’ll have more work to do if you make more deals, but that’s only good if you can deliver.
It’s either a capacity or efficiency problem if you see some things in your backlog taking longer than expected or if you’re only getting them done slowly. It’s possible that you took on too much. Or maybe your teams that work on development and implementation are too busy to get new users set up quickly enough.
If you’re falling behind on many contracts and your list is getting bigger, it’s time to take a closer look at why that is.
Unexpected Drop in Sales
Your backlog is affected by your churn rate in a big way. If many customers cancel their contracts before they finish the purchase, the TCV you determined from active contracts won’t show how your business is doing. You’ll have too high hopes for them, and the money you thought they would bring in won’t happen.
Bad customer service or billing
If you have problems with billing and payments, there may be a difference between what’s in your backlog and what you should count as income. Customers who pay late might change the data, which could lead to an incorrectly high amount. Track billing and payment metrics closely so you can handle the issues that would otherwise negatively impact cash flow or future revenue.
Pricing strategies that don’t work
If there is always more demand than supply for your product or service, you might want to consider how much you charge. Setting prices that align with what the market wants can help you get and keep more customers. Then, use your backlog to attract investors and plan where to put your money to help your business grow.
The market situation
Problems with the world economy, the supply chain, and other things can make things difficult, even if you don’t believe they directly affect you or your customers. Perhaps the most obvious example is the COVID-19 pandemic, which caused significant problems in almost every business.
- Customers in the SaaS world broke long-term subscription deals because their budgets were cut drastically, and their needs changed because they worked from home.
- Manufacturers faced supply chain problems as many companies halted production. Because of this, they might not be able to send the goods on time.
- Less desire for some goods and services took away the customer’s entire reason to purchase in the first place.
- Some companies shut down permanently, so they could never finish the contract term.
Another thing that might make people less likely to join your service is layoffs. If you’re firing people, it could also make it harder for you to keep your end of the deal.
Best Ways to Cut Down on Revenue Backlog
- Meet your contractual obligations on time.
- Delivering your service on time is the easiest and most apparent way to cut down on your backlog.
- This means, for SaaS subscription deals, making your customer onboarding process as quick and easy as possible.
- Keeping the training and delivery processes on track Keeping an eye on your customers’ time to value
- Getting teams and groups to work together better to get rid of bottlenecks
Holding on to your workers to avoid problems
Getting rid of any outside or inside threats that might cause transport times to increase. Keeping track of and studying customer feedback to find ways to make things better
Putting money into automatic tools to make things run more smoothly and quickly
You should also hire contract or part-time workers to help with extra work and to handle a surge in customer demand. This way, you can make up for lost time on some projects.
Pay attention to keeping customers.
Some parts of long-term contracts say neither you nor the customer can back out for at least a certain amount of time. Keeping customers is essential to cutting down on your backlog, even if yours doesn’t do it. This is especially true if you run a business that makes money regularly.
This means that lowering your revenue backlog is a product and customer success problem, even though it’s a financial reporting metric. If you ensure your customers get the most out of their deals, they will be less likely to back out early.
Here are some ideas:
Share the best features, tips, and how-tos for your product or service to help people get more out of it.
Make groups for your customers where they can talk to you and each other, share ideas, and ask questions.
As soon as possible, answer customer questions.
Make billing easier
Make sure your customers pay on time to avoid a lot of trouble when keeping them as customers. Also, it would be best if you made it simple for them to pay.
There are a lot of different ways to pay.
Automatically send bills and notes.
Give your customers ways to change their plans or update their payment information without talking to your team.
If you use an invoicing or subscription management tool with automated billing, you won’t miss or be late on payments, which will help you get rid of your backlog at the correct rate.
Improve pricing
Whether or not your backlog turns into income depends greatly on how well your prices match your value proposition and how much people are willing to pay.
To optimize prices, you need to find the best mix between meeting your business goals and making the product appealing to the people you want to buy it from. Price elasticity, rival prices, and your costs should all be considered when setting the best price.
Another thing you should do is try out different price models (like different levels of products or terms of service) to see which ones work best for your customers and are the easiest to support on a large scale.
Cash Flow Management That Works
People can still have trouble with cash flow even if everything goes as planned. You can’t really invest in growth projects like hiring more staff or doing more marketing if you don’t have enough money to run your business.
You can avoid this by ensuring you’re good at handling your cash flow.
Predicting costs and income accurately
- Creating a budget that allows for fluctuations in revenue ·Having an emergency fund or backup plan in case of unexpected financial problems
Making conservative guesses about how much money you expect to make in the future based on your workload and planning accordingly
Using risk management strategies to lower the money-related dangers that might come from outside sources, like economic downturns and global pandemics
