the revenue earning and recognition process

Going into further details, it is important to know about the revenue earning and recognition process.
The revenue earning and recognition process of delivery teams is characterized by installments paid in advance, accrued delivery expenses and un-earned revenues. Companies recognize service contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. When the contracts are of relatively short duration (weeks or months), as is usually the case in ICT, the accounting process can be simplified as described on the figure:

The hypothesis used for this graph is a payment agreement in thirds:

1. a third of the total amount of services at the order,
2. a third at a defined milestone during the delivery of the project,
3. a third at the project hand-over to the customer.

The graph shows that revenue is earned only after services are delivered. As a consequence, procrastination and delays have a huge impact on the accounting side:

• delaying projects,
• not knowing where they stand within their delivery cycle,
• neglecting to properly finish them,
• not handing them over to the customer along with the last bill

all can have a profound impact on cash flow and the ability of the company to pay its charges. Up to 2 thirds of the service amount can be waiting for invoicing at the end of a project. Worse: in some structures, or in some specific cases, the total amount of services is not even billed before the project is 100% completed. As this can put a serious strain on the company’s finances, everyone in a team has to be aware of the accounting mechanisms and the consequences of not delivering a project in time. Let me emphasis this statement: