Last editedDec 20212 min read
Every SaaS and subscription-based business must keep track of the various types of revenue they have coming in, and this is a difficult enough task. That’s why some firms don’t keep track of their revenue backlog, as it’s not a statistic that is recorded on financial statements.
However, revenue backlog calculations are an excellent way to get an overview of a company’s general trajectory.
What is revenue backlog?
Revenue backlog refers to the value of revenue due from a subscription contract that has yet to be completely fulfilled. A backlog revenue calculation will consist of the total revenues due from customers that are contracted to pay but have yet to be invoiced for the entire amount due to the subscription still running its course.
Such revenue backlogs can occur with non-subscription business models as well, though they are much more frequent with subscription-based business models and SaaS. Plus, while we know that one of the main causes of revenue backlog is recurring revenue, especially for SaaS businesses, there are other transactions that can contribute to revenue backlog depending on how they are financed.
One-time service provisions
Why revenue backlog is important
Revenue backlog is not included on balance sheets and other official financial statements, though a lot of companies still like to include a backlog revenue calculation in reports for executives and boards of directors as well as investors.
The backlog revenue calculation is included with these internal reports as it reveals the cumulative value of all the subscription contracts the company has in play. Investors especially appreciate a backlog revenue calculation as it provides insight into the overall financial health of the business they have invested in.
Revenue backlog vs deferred revenue
Revenue backlog is often confused with deferred revenue as they seemingly refer to similar things, but they are quite different. Deferred revenue explicitly refers to individual periods within a subscription contract, while revenue backlog is about the total contract value irrespective of how many individual periods have or have not been fulfilled.
Another significant difference between revenue backlog and deferred revenue is that revenue backlog is not a GAAP reporting number, while deferred revenue is.
How to make a backlog revenue calculation
On the face of it, making a backlog revenue calculation should be a fairly simple affair as you are just adding up all the values of your current contracts. However, the tricky part of it is knowing exactly which values should be included in the calculation.
So to begin, your backlog revenue calculation needs to include the total sums of all unrecognised revenue due over the terms of every SaaS contract or subscription agreement. You also have to include the non-recurring services as well as the recurring ones, such as training staff and software implementation and integration.
Your backlog revenue calculation should also include the value of any other professional services that have yet to be completely provided. Plus, you must add in any contracted or committed revenue that cannot yet be recognised on an official financial statement due to pending customer acceptance criteria.
Once you have included all of the above in your revenue backlog calculation, you can take it a step further, or better yet, create two calculations. The first calculation would consist solely of the items described above, but the second calculation can also include projected revenue. This means including the future value of active subscriptions, and even subscriptions that are still pending.
All that is required to include such projections in your revenue backlog calculation is that there is satisfactory evidence that each customer will fulfil their obligations and that your company can meet the terms.
We can help
If you’re interested in finding out more about understanding your revenue backlog, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.