Accrued revenues are how we represent a job, or quote, over a period of time as chunks of work instead of a one-time transaction. Let’s say we receive a quote for $2000 and our delivery date is in four weeks. If we were to input the $2000 when we receive the quote or after we have finished the job, we would be misrepresenting the company’s trajectory, especially if we span over multiple months. For example, if we were to receive multiple quotes in August but all of their deadlines are in September all of the revenue would be counted for September even if most of the work was done in August. The company’s revenue trajectory would look very jagged instead of an ideally upward slope.
Another important concept about accrued revenues is that they are made up of 3 components:
Usage revenue is the amount of money we are receiving from clients for doing work and it is broken down to the instance level. We only accrue usage revenue when we are performing a task for a client.
A discount is the amount, if any, by which an AD would reduce a client’s bill (refund, discount, compensation). It is super important that we catalog these changes as discounts instead of subtracting from the quote because this is how we get negative usage revenue-which we don’t want in these cases! For example, if a client is quoted at $2000 and two weeks in their AD decides to give them a $500 discount, we would want to add a $500 discount, not subtract from the quote total. So, we would have a quote of $2000 and a discount of $500.
A critical distinction to make here is between a discount and re-quoting work. There are certain cases in which we don’t know exactly how much work we are going to have to do for a client until we finish. In only these cases are we changing the amount of the quote instead of applying a discount and this is the only situation where negative usage revenue is acceptable.
Fees positively affect our accruals. For the most part, all of the fees we accrue are the amounts from a client’s subscription that they don’t use. Whatever portion of their subscription that a client uses becomes usage revenue and we consume the unused subscription as fees. So, if a client is on a $1000 monthly subscription and uses $750, we would have $750 of usage revenue and $250 of fees.
To review, usage revenue and fees accrue positively and discounts, negatively. It is very important to know the distinctions between these types of accruals because misunderstandings can cause issues in reporting.
Accrued revenue reporting is consolidated in this dashboard for revenue rollups and its cards as well as the Company Metrics dashboard. The Company Metrics dash is our “front page” for investors and another reason accurate reporting of accrued revenues is crucial.
When we receive the delegation quoted at $2000, the $2000 would be listed as a quote, and an estimated benchmark for the number of hours of work is set. If the estimated benchmark is 100 hours, then we will accrue $20 of usage revenue for every hour of work we track. By the deadline, either the amount of $2000 will have been accrued in usage revenue or we will accrue the remaining amount when the delegation is moved to the Done stage.
Here is an example of a delegation that was quoted for $6.78 and the delegation accrued usage revenue over the course of four months: