Don't count your chickens before they hatch! A beginner’s guide to revenue recognition for project-based businesses.
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Revenue recognition. It’s a bit like chickens and eggs. You should never count your chickens before they’re hatched. And you shouldn’t count your revenue before it's recognized.
When you look at it through a farmyard frame, it’s really easy to see what's what and balance the books (or should that be clucks?) But when you’re talking money, it all looks the same, which makes things harder to reconcile.
This is why revenue recognition standards are so important. They clarify exactly when an egg becomes a chicken. This helps businesses monitor their financial outcomes accurately, and managers keep projects on schedule and budget.
Here’s what you need to know about revenue recognition for project-based businesses – and how to do it in Runn.
Revenue recognition is concerned with how and when you record your revenue. ‘Recognized’ just means you’ve provided the goods or services you promised, you’re able to invoice, and the revenue can safely be recorded in your company accounts.
There are two approaches to revenue recognition: cash and accrual.
Revenue and expenses are recognized when they’re paid. Cash-based accounting is typically only used in smaller or less complex businesses. It’s simple but doesn’t accurately reflect a company’s financial health (for example, if they’ve paid expenses but not been paid by the client yet, they look like they have less money than they really do).
Revenue is recognized when work is completed, regardless of whether the money has been paid yet. Accrual is preferred – and legally mandated – for most larger organizations. Check out the five revenue recognition standards below.
Accrual basis accounting is more complex, but it gives a more accurate reflection of an organization’s financial health. This isn’t just important for the business; it also helps regulators and investors accurately judge performance (comparing chickens to chickens, not chickens to eggs).
The five revenue recognition standards are based on the overarching principles of:
The two main models are from the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP).
Following these models provides a robust and consistent framework for revenue recognition:
Revenue recognition methods matter in project accounting because businesses need to recognize revenue as projects progress, not just at the end.
In project-based businesses, work happens in phases, effort and expenses accumulate over time, clients may pay in installments, and some work might never actually materialize. This makes it really hard to balance the books and understand financial health in real-time.
That’s why, in professional service firms, revenue is usually recognized as work is delivered or milestones are achieved. For example:
This helps businesses understand their current financial health and keep money flowing into the business. As milestones are achieved, project managers will alert their finance team to let them know revenue can be recognized.
But it’s not just about reporting up.
Effective revenue recognition practices help project managers to understand how much revenue has been raised so far, what budget remains, and whether they’re on track to deliver projects profitably. This helps spot and correct any issues while projects are in-flight, rather than waiting until the end, when it may be too late.
Further reading: The Ultimate Guide to Improving Operational Efficiency ➡️
Now you know why it's important, you’ll want to know how to do it. As you might expect from Runn – since we designed our platform to make your lives easier – you’ll find this process simpler if you use the right tools.
The first step is to clarify the rules for revenue recognition. This could be tied to milestone completion, percentage work completed, or other measurable outputs.
Clear revenue recognition criteria ensure everyone – from your PM and finance teams, to clients – understands what counts as earned revenue, helping avoid any confusion or misreporting.
It’s important to consider regulatory and industry-specific guidance for revenue recognition – like IFRS and GAAP above – which provide frameworks for recognizing revenue consistently and legally.
Next, when planning the project, define the criteria by which revenue will be recognized. This usually means breaking the project into milestones, if that’s how you plan to recognize revenue.
Alternatively, if revenue is recognized based on time or effort, define work units such as billable hours, days, or tasks that will trigger revenue recognition.
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For each milestone or work unit, forecast the expected revenue. This helps project managers monitor whether work is delivering the revenue anticipated, and ensures that revenue is recognized in line with actual project progress.
Remember, expenses should be recognized in the same period as the corresponding revenue, so that the books remain balanced and financial reporting accurately reflects profitability.
There are several metrics important in project financial management. Monitoring them will help ensure you recognize revenue correctly and keep projects on track.
If revenue recognition has you running around like a headless chicken, you need — well – Runn. With intuitive project accounting tools and real-time data dashboards, you can confidently recognize revenue at the right time, keep projects and budgets on track, and maintain a healthy profit.
