Often overlooked, revenue backlog is an important financial statistic that all subscription business should be aware of, should be actively monitoring and effectively managing in order to protect their subscription business, encourage business growth and promote financial health.
Important, not least because potential investors may wish to use it in order to evaluate the future of your business, revenue backlog can also be a useful way for subscription businesses to monitor the chances of their future commercial success.
In this blog we explain what revenue backlog is, what its implications are for your subscription business and consider what strategies subscription businesses may wish to consider employing in order to effectively manage their revenue backlogTop of Form.
Bottom of Form What is revenue backlog?
Revenue backlog is just one type of revenue stream that subscription businesses need to keep an eye on. Often overlooked by subscription businesses, revenue backlog is the total unrecognized revenue of subscription business across the term of a particular subscription agreement.
The revenue backlog of a subscription business will often come from recurring revenue but revenue backlog may also include revenue from other sources such as investments or one-time product sales.
So, a calculation of a revenue backlog of a subscription business will consist of total revenues due from customers contracted to pay under the terms of a subscription agreement but who have yet to be invoiced by a business for the total amount due under a subscription agreement.
Is revenue backlog the same as deferred revenue?
No, but revenue backlog is sometimes confused with deferred revenue.
Revenue backlog is about the total value of a subscription agreement regardless of what has been fulfilled under that agreement.
In contrast, deferred revenue (also sometimes known as unearned revenue) is concerned about individual periods within a subscription agreement and refers to advance payments a subscription business is due to receive from its customers for products and/or services that are to be delivered or performed in the future. Revenue backlogs are more for financial commentary
Deferred revenue is an official metric that features heavily on a balance sheet and is central to financial reporting. But, revenue backlogs provide commentary on a financial document, with particular respect to for example, revenue forecasting and financial predictions.
How do subscription businesses record revenue backlog and deferred revenue?
Revenue backlog and deferred revenue will likely be recorded (or not as the case may be) in different ways.
A revenue backlog is often not recorded in any particularly useful way so that it can be compared to other revenue statistics for a subscription business. For instance, because revenue backlog is not a reporting number, it will not appear on a the financial statements/balance sheet of the subscription business.
Even so, many subscription businesses are likely to include their revenue backlog figures when reporting to senior management and boards because such data will help demonstrate the cumulative value of all subscription agreements that the business model for a particular subscription business can command. Business revenue backlog figures will comprise revenue totals that customers have agreed to pay but are not yet to be invoiced due to their long-term nature - those invoices only being rendered on, say, a weekly/monthly/quarterly basis depending on the nature of the subscription agreement in place.
However, a subscription business receiving an advance payment will record the amount received as deferred revenue and that amount will then be reflected as a liability on the balance sheet of the business. Deferred revenue is a liability because it reflects revenue that has not been earned and represents products and/or services that are owed to a customer. As a product or service is delivered over time, deferred revenue is recognized proportionally as revenue on the financial statements of the business in question.
Why revenue backlog matters
Revenue backlog figures are an important indicator of business success because they demonstrate the extent to which a subscription business is winning and fulfilling new business. By monitoring its revenue backlog, a subscription business will be able to keep a close check on the quantity of new business it is taking on, its delivery timelines and fulfilment capabilities, and the number of items in its backlog. Understanding revenue backlog will therefore assist subscription businesses seeking to develop an effective sales strategy.
How should subscription companies classify a revenue backlog?
The very existence of a revenue backlog in a subscription business means that it has not yet delivered on what it has agreed to under the terms of a subscription agreement it has with its customers. All revenue backlog counts as unfulfilled and should be classified, accordingly, as:
Not yet fulfilled - both revenue backlog and deferred revenue make note of a the unearned income of a business - a liability to be fulfilled at a later date upon the provision of the service/product;
Not recorded - revenue backlogs are not classified or recorded in the same way as other revenue metrics because a public company doesn’t need to record a revenue backlog in its balance sheet. The way in which a subscription business chooses to keep track of revenue backlog can be entirely informal; and
Not invoiced - while deferred revenue can increase or decrease depending on how and when a customer is invoiced, a revenue backlog only counts down. No invoices are involved, revenue backlog simply declines over time as revenue is recognized. Deferred revenue starts once your customer receives their invoice while a revenue backlog starts the moment a contract is agreed on which may be sometime before the beginning of the invoicing period.
Revenue backlog and valuation of your subscription business
Your revenue backlog can make all the difference when it comes to the valuation of your business that is, it can be the difference between a good and a bad valuation. When evaluating the attractiveness of your subscription business buyers will be keen to understand your ability to fulfill the value of the subscriptions agreements that are being entered into and not just what a business’ stated aims are.
The easiest way for a buyer to do this will be to look at the difference between revenue targets and revenue backlog. Because revenue backlog does not fluctuate in the way that deferred revenue does, buyers often prefer to use it to evaluate the performance thus far of your business and gauge the amount of risk in your revenue forecast. It gives a far more total overview of your approach to new business, financial management, and even your philosophy on managing customer relationships across a lifetime.
Conclusion
It is clear then that although often overlooked, revenue backlog is an important financial statistic that all subscription business should be aware of and should be closely monitored and managed in order to protect business, encourage growth and promote financial health. Revenue backlog is a useful way for subscription businesses to determine the chances of their future success and may therefore provide potential investors with a straightforward way of evaluating whether they wish to investTop of Form.
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Billsby is a sector-leading cloud-based subscription billing software company, helping businesses manage the issuing of invoices and the collection of recurring payments, whilst providing award-winning customer service support. Ranked by G2 as the Number 1 subscription billing platform, Billsby streamlines billing operations, offers flexible subscription management, integrates with various systems, and provides real-time analytics, enhancing efficiency and scalability.
Billsby provides the simplest and easiest solution for subscription businesses choosing to adopt a subscription billing model, helping them maximize their subscription revenue potential. For more in-depth guidance and bespoke solutions, visit www.billsby.com today.
