.png)
Estd 4.22.2023
In the complex ecosystem of SaaS financial metrics, unbilled revenue stands out as a particularly important indicator of business health and future performance. While metrics like MRR, ARR, and churn rate often dominate conversations around SaaS financial performance, unbilled revenue offers unique insights that can significantly impact forecasting, valuation, and operational decisions. This article explores what unbilled revenue is, why it matters for SaaS executives, and how to measure it effectively.
What is Unbilled Revenue?
Unbilled revenue (sometimes called accrued revenue) represents the value of goods delivered or services performed that have not yet been invoiced to customers. In SaaS businesses specifically, it typically occurs when:
- Services have been provided according to contract terms but not yet billed
- Work has been completed but is awaiting formal approval before invoicing
- Revenue recognition timing differs from billing schedules
- Usage-based billing components await end-of-period calculations
Fundamentally, unbilled revenue reflects a timing difference where value has been delivered but payment has not yet been formally requested. Under accrual accounting principles, this revenue is recognized on financial statements even though the billing event hasn't occurred.
According to research from MGI Research, unbilled revenue typically represents between 3-15% of total recognized revenue for established SaaS companies, though this percentage can be significantly higher for organizations with complex billing models or longer invoicing cycles.
Why is Unbilled Revenue Important?
The significance of unbilled revenue extends across multiple dimensions of SaaS business management:
1. Cash Flow Management
Unbilled revenue represents future cash inflows that haven't yet been formalized through invoicing. As Deloitte notes in their 2022 SaaS financial management guide, "High levels of unbilled revenue relative to historical patterns may indicate operational inefficiencies in billing processes that are delaying cash conversion cycles."
For SaaS executives, understanding the gap between revenue recognition and cash collection is crucial for effective working capital management and investment planning.
2. Revenue Recognition Compliance
With ASC 606 and IFRS 15 standards, proper revenue recognition has become increasingly complex. Unbilled revenue plays a central role in complying with these standards, particularly for SaaS companies with multi-element arrangements or variable pricing components.
"Maintaining accurate unbilled revenue records is often the difference between a smooth audit process and a costly, time-consuming remediation effort," explains David Appel, Head of SaaS Vertical at Sage Intacct.
3. Operational Efficiency Indicator
The ratio of unbilled to billed revenue can reveal inefficiencies in contract management, service delivery, or invoicing processes. A consistently high or growing ratio may signal underlying operational issues that require attention.
4. Valuation Impact
For SaaS companies approaching funding rounds or exit scenarios, unbilled revenue can significantly impact valuations. Investors and acquirers examine the quality and consistency of unbilled revenue patterns to assess revenue predictability and business scalability.
According to a 2023 study by KeyBanc Capital Markets, SaaS companies with efficient unbilled-to-billed revenue conversion (typically under 30 days) commanded valuation premiums averaging 0.8x higher revenue multiples than peers with longer conversion cycles.
How to Measure Unbilled Revenue Effectively
Measuring and monitoring unbilled revenue effectively requires both technical infrastructure and process discipline:
1. Establish Clear Definitions
Begin by clearly defining what constitutes unbilled revenue in your specific business context. This definition should align with both accounting standards and the practical realities of your service delivery and billing operations.
2. Key Metrics to Track
Several metrics provide insight into unbilled revenue dynamics:
- Unbilled Revenue Ratio: Unbilled revenue divided by total recognized revenue, expressed as a percentage
- Unbilled to Cash Conversion Period: Average time between revenue recognition and invoicing
- Aging of Unbilled Revenue: Analysis of how long revenue has remained unbilled
- Unbilled Revenue by Customer Segment: Distribution across customer types to identify patterns
3. Implement Appropriate Systems
Modern financial management requires systems that can handle the complexities of SaaS revenue recognition and billing:
- Revenue recognition automation tools
- Contract management systems with revenue schedule capabilities
- Billing platforms with flexibility for diverse pricing models
- Reporting tools that provide visibility into unbilled components
"Manual tracking of unbilled revenue in spreadsheets becomes practically impossible beyond $5M ARR," notes Jason Lemkin of SaaStr. "Investing in proper revenue management infrastructure pays dividends in reduced audit costs and financial accuracy."
4. Regular Review Processes
Establish structured review processes at regular intervals:
- Weekly operational reviews of unbilled status
- Monthly reconciliation between recognized and billed revenue
- Quarterly analysis of trends and outliers
- Annual comprehensive audit of unbilled revenue practices
Best Practices for Managing Unbilled Revenue
Beyond measurement, effective management of unbilled revenue requires strategic approaches:
1. Optimize Billing Cycles
Evaluate whether your billing cycles align optimally with value delivery. Many SaaS companies have found that shorter billing cycles or milestone-based invoicing can reduce unbilled revenue while actually improving customer relationships.
2. Automate Billing Triggers
Implement automated triggers that generate invoices based on predefined events rather than calendar dates. This approach ensures tighter alignment between service delivery and billing.
3. Improve Contract Structure
Review contract templates to ensure they support efficient billing practices. Clear deliverables, well-defined acceptance criteria, and explicit invoicing terms can significantly reduce unbilled revenue accumulation.
4. Cross-Functional Collaboration
Foster collaboration between finance, sales, and customer success teams to address unbilled revenue challenges comprehensively:
- Sales teams should understand how contract structures affect revenue recognition
- Customer success should promptly communicate service delivery milestones
- Finance should provide visibility into unbilled status across the organization
Conclusion
Unbilled revenue represents a critical metric that provides unique insights into a SaaS company's operational efficiency, financial health, and future cash flows. By understanding its significance, implementing robust measurement practices, and developing strategic approaches to management, SaaS executives can transform unbilled revenue from an accounting technicality into a strategic business lever.
As the SaaS industry continues to mature and investors become increasingly sophisticated in their analysis, companies that effectively manage the gap between service delivery and billing will gain competitive advantages in both operational performance and market valuation. For today's SaaS executives, mastering unbilled revenue management represents not just an accounting necessity but a strategic imperative.