The InvoiceSherpa Blog

What is Unbilled Accounts Receivable?

Are you puzzled by the concept of unbilled accounts receivable and its impact on your business's financial health? You're not alone. This often-overlooked aspect of accounting can be a silent disruptor of cash flow and revenue management. 

Understanding and managing unbilled receivables is crucial for accurate financial reporting and maintaining a healthy balance sheet. By the time you finish reading this guide, you’ll feel confident in your ability to do so.

We'll unravel what unbilled revenue is, what causes it, and how to account for it. You’ll also see how our accounts receivable automation software can optimize your financial management to help you get paid faster, save time, and improve key relationships with customers. Let’s dive in!

What is Unbilled Accounts Receivable?

So, what is unbilled accounts receivable? This represents revenues earned by a business but not yet invoiced to the customer. This situation typically arises in service-based industries or businesses engaging in long-term projects. 

For instance, a company may have completed part of a project or provided ongoing services under a contract but has yet to issue an invoice for these services. These receivables are an assertion of the right to bill the client in the future for work already performed or goods already delivered. 

Unbilled receivables can significantly impact a company's cash flow. In fact, it’s not uncommon for issues here to be how cash flow problems start

While they indicate future revenue, they do not contribute to immediate cash availability. This can create challenges in managing day-to-day operational expenses and financial planning.

There’s also the challenge of revenue recognition. This represents revenue that has been earned but not yet recognized officially in the financial statements. Correctly accounting for these receivables is essential for accurate financial reporting and compliance with accounting standards.

Understanding all this is crucial for businesses, especially those engaged in project-based or contractual work. Proper management ensures accurate financial reporting and effective cash flow management, which are vital for the overall financial health of the business.

You can learn more about why cash flow management is important in our blog. Let’s talk about unbilled vs billed revenue for now, though.

Unbilled vs Billed Revenue

Understanding the difference between these types of revenue. is essential for accurate financial reporting and effective business management.

Billed revenue comes from services or products that have been invoiced to the customer. It's recognized once an invoice is issued, reflecting a formal request for payment. 

It is more immediate and tangible, as it's tied to invoices that are expected to be paid within a standard payment term.

Conversely, unbilled revenue arises from services rendered or products delivered for which an invoice has not yet been issued. This might be due to ongoing projects, contractual arrangements, or timing differences in billing cycles.

That being said, these types of revenues impact your financial management in different ways. In the balance sheet, billed revenue appears under accounts receivable, while unbilled sources might be listed as a current asset, reflecting its expected conversion to cash within a year. 

On the income statement, the recognition of these revenues affects net income and, consequently, the company's profitability. The management of unbilled and billed revenues influences key business decisions, too. 

For instance, a high amount of unbilled revenue can signal the need to accelerate the billing process or reevaluate contract terms. Conversely, a focus on increasing billed revenue can improve cash flow and reduce financial uncertainty.

How Does Unbilled Accounts Receivable Occur?

Now, how does unbilled revenue occur in the first place? It can arise from several situations, often linked to the nature of business operations and administrative practices. After we walk you through these causes we’ll talk about how to address them. 

Delayed Invoicing: Challenges in Timely Billing

Delayed invoicing is perhaps the most common culprit. This delay can be intentional, as in a strategy to align billing with project milestones, or unintentional, stemming from inefficiencies in the invoicing process.

Challenges in timely billing often arise in businesses where the billing process is complex or dependent on the completion of certain tasks or deliverables.

We’ll talk more about this later on, but you can reap the accounts receivable automation benefits or rely on accounts receivable management services to overcome this issue if delayed invoicing is the root cause.

Service Delivery and Billing Misalignment: Complex Projects and Long-Term Contracts

In industries dealing with complex projects or long-term contracts, such as construction or consulting, there's often a lag between service delivery and billing. This gap is mainly due to the time needed to assess the work completed and its alignment with contractual terms.

Such businesses may complete significant portions of work before being able to invoice, leading to substantial unbilled receivables.

Administrative Oversights: Errors and Omissions in Record-Keeping

Sometimes, the cause of unbilled revenue is nothing more than a clerical error. Administrative oversights in record-keeping can also be a cause. This includes errors or omissions in tracking billable hours, project progress, or delivered goods.

Inefficient or outdated administrative systems contribute significantly to such oversights. Without proper tracking mechanisms, services rendered or products delivered might not be promptly or accurately invoiced.

Again, this is another reason why billing automation software is such a great investment - it doesn’t make mistakes that a human might. We’ll offer insights on using tech to address unbilled revenue challenges later on. We need to first discuss accounting for this revenue on your financial statements.

Accounting for Unbilled Receivables on Your Balance Sheet or Income Statement

Proper accounting is crucial for accurate financial reporting and compliance with accounting standards. Here’s how you should go about it.

Recording Unbilled Receivables: Step-by-Step Process

The process of recording unbilled revenue is actually fairly simple. It takes just 4 steps:

  1. Identification: The first step involves identifying the revenue earned but not yet billed. This could be from ongoing projects, services rendered, or goods delivered.
  2. Documentation: Document the details of the unbilled services or products, including the date of completion or delivery, the amount to be billed, and any relevant contractual terms.
  3. Create a Journal Entry: Record the unbilled receivable in the accounting system. Typically, you would debit unbilled accounts receivable and credit revenue. This reflects the earned revenue on the income statement before invoicing.
  4. Adjustment Upon Invoicing: When the invoice is eventually issued, adjust the accounts by debiting accounts receivable and crediting unbilled accounts receivable. This transfers the amount from unbilled to billed status.

Regular Reconciliation to Ensure Accuracy in Financial Reporting

We encourage you to regularly reconcile the unbilled account. This is something you should typically do monthly. It involves verifying that the revenues recorded as unbilled have been accurately captured and match the services or goods delivered.

Monitor when invoices are issued for previously unbilled revenues and ensure corresponding adjustments are made in the accounting records. Ensure that the income recognized from unbilled sources aligns with the revenue reported on the income statement. This is crucial for maintaining the integrity of your financial reporting.

You can learn more about accounts receivable reconciliation in our blog. But for now, let’s offer tips on avoiding occurrences of this issue going forward.

Tips for Avoiding Occurences of Unbilled Revenue

The truth is that unbilled accounts receivable can be a headache to manage. This is why you should take steps to minimize its occurrence. Through careful policy measures and the power of technology, you can put the stress and confusion of unbilled revenue in the past!

Proactive Measures and Policies

There are three things you can do in an effort to minimize this hassle:

Leveraging Technology for Better Tracking and Invoicing

While accounts receivable outsourcing is certainly an option, there is always going to be the risk of human error leading to unbilled revenue. That’s why we recommend you harness the power of automation.

Automated systems can trigger invoices based on certain actions, like the completion of a service or reaching a project milestone. You can also implement tools that provide real-time tracking of services rendered or products delivered. This helps in immediately identifying billable activities.

For the best accounts receivable automation software, look no further than InvoiceSherpa. Our software gets you paid faster while saving internal resources that would otherwise be spent managing the AR and invoicing process. And, it can alleviate challenges associated with unbilled receivables.

InvoiceSherpa automates invoice generation, ensuring that as soon as a service is delivered or a project milestone is reached, an invoice is promptly created and sent. You can set up custom billing schedules suited to different types of projects and services, ensuring no billable activity slips through the cracks.

Clients can access a portal to view their service usage and pending invoices, promoting transparency and potentially reducing disputes and delays in payments. You won’t have to stress about sending an invoice to collections nearly as frequently, if at all!

InvoiceSherpa can integrate with various project management tools, ensuring seamless tracking and billing of ongoing projects. Setup takes just a few clicks as you can effortlessly connect with Quickbooks, Xero, or Clio. 

Plus, you get comprehensive reports on billed and unbilled activities, giving you clear insights into potential revenue that hasn't been invoiced yet. With a 14-day risk-free trial, what do you have to lose? See what a difference our software can make in your accounting process today.

Wrapping Up Our Guide to Unbilled Receivables

There you have it - everything you need to know about unbilled accounts receivable. We hope this conversation leaves you feeling clear and confident on not only what unbilled revenue is, but where it comes from and how you should address it.

With stricter invoicing policies and the power of technology, you can put the headaches associated with unbilled receivables in the past for good.

Our blog has more great resources and small business accounting tips on topics like how to calculate accounts receivable, forecasting accounts receivable, what to do when an account becomes uncollectible and must be written off, what’s a good accounts receivable turnover ratio, and more.

Eliminating accounting mishaps and frustrations starts with a better invoicing system. It starts with InvoiceSherpa. Learn more about how our software can streamline your accounting processes today!

Posted on January 2, 2024

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