What are unbilled receivables, and why do they matter for SaaS?

Unbilled receivables represent revenue earned but not yet invoiced. While they signal future income, they also pose challenges to cash flow, forecasting, and customer satisfaction.

In this post, we’ll explain why unbilled account receivables are a common phenomenon in SaaS.

You'll learn:

• The definition and causes of unbilled receivables in SaaS
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• How unbilled receivables impact cash flow, forecasting, customer satisfaction, and financial reporting
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• Strategies to minimize unbilled receivables and improve billing efficiency

Let's kick things off by explaining what unbilled receivables are.

What are unbilled receivables?

Unbilled receivables (also known as unbilled revenue or unbilled AR), represent the value of services your SaaS company has already delivered to customers. The key here is you haven't yet sent an invoice for these services.

How do they happen?

Several scenarios can lead to unbilled receivables in the SaaS industry:

• Invoice delays: Perhaps there's a hiccup in your billing system, or maybe you're transitioning to a new platform. If invoices are generated late, any payments received during that lag time become unbilled receivables.
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• Work completed before invoicing terms: If your SaaS company provides services but billing is scheduled for a later date (i.e., the end of the month), the work completed before that point becomes unbilled receivables until the invoice is generated.
  
  In accrual accounting, this unbilled revenue is recognized as accrued revenue on the income statement because the service has already been performed.
• Milestone billing: Many SaaS companies bill clients upon reaching specific project milestones. This type of billing is common in companies offering implementation or consulting services. Any work completed before a milestone is reached contributes to unbilled receivables.

Why should SaaS businesses care?

Unbilled receivables are a crucial part of your financial picture, even if they don’t immediately impact your bank account. They reflect earned revenue, meaning you've already done the work, and the money is rightfully yours, even if it's not yet in your pocket.

Let’s look at more reasons why unbilled receivables are important for SaaS companies:

• Accurate financial reporting: Ignoring unbilled receivables can lead to an incomplete picture of your company's financial health.
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• Informed decision-making: Whether it's budgeting, forecasting, or considering investments, having a clear grasp of your unbilled revenue is vital for making sound business decisions.
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• Revenue leakage prevention: Unbilled receivables can slip through the cracks if not tracked. Neglecting unbilled AR can lead to missed revenue and potential financial losses.

Note: We’ll analyze these more deeply in our next major section.

Example scenario: A SaaS company offering a monthly subscription service

Let’s say a customer upgrades their plan mid-month, but your billing system is set to generate invoices at the beginning of each month.

The extra revenue from the upgrade for the rest of the current month would be considered unbilled revenue until the next invoice.

How unbilled receivables impact SaaS companies

Unbilled receivables, while representing earned revenue, are not immediate cash in hand. This temporal disconnect can have ripple effects across various aspects of a SaaS business. Let’s analyze these effects in more detail:

The cash flow conundrum

Cash flow is the lifeblood of any business, and SaaS companies are no exception. Unbilled receivables, by their very nature, create a gap between the delivery of services and the receipt of payment.

This gap can strain cash flow, especially for businesses with high growth rates or those heavily reliant on upfront payments.

Imagine a rapidly expanding SaaS company onboarding a slew of new customers with annual contracts. The revenue is recognized, but the actual cash inflow is spread out over the year. This mismatch can create challenges in meeting immediate operational expenses. It can also keep you from investing in growth initiatives and maintaining a healthy financial buffer.

The challenge of financial forecasting

Accurate revenue forecasting is crucial for strategic planning in the SaaS. Unbilled receivables, however, can introduce an element of uncertainty into this process.

While they represent future cash inflow, the timing of that inflow can be influenced by various factors. Think billing cycles, customer payment habits, or disputes.

Because of these factors, it can be challenging to predict short-term cash availability and plan accordingly. It's akin to navigating a foggy road — you know where you’re going, but visibility is greatly reduced.

The impact on customer satisfaction

Delayed or inaccurate billing equals unhappy customers. Imagine a customer being charged for services they haven't yet received. Even worse, imagine them finding discrepancies in their invoices.

Some examples include but are not limited to:

• The customer is charged for services they did not request.
• Invoices include incorrect service rates or discounts.
• The customer is billed twice for the same service.
• Billing details are incomplete or missing key information.

Such experiences can erode trust and damage the customer relationship. In SaaS, maintaining a smooth and transparent billing process is essential. Unbilled receivables, if not managed, can disrupt this process and create unnecessary friction.

Financial reporting and ASC 606 compliance

Unbilled receivables must be tracked to ensure compliance with accounting standards like ASC 606. This standard mandates that revenue be recognized when performance obligations are satisfied. It applies as long as obligations are fulfilled when the payment is invoiced.

Unbilled receivables need to be tracked and reported to present a true and fair view of a company's financial performance. Failure to do so can lead to non-compliance and potential legal repercussions.

Mismanagement of unbilled receivables distorts financial statements, potentially causing auditors to flag discrepancies during the audit process. These inconsistencies can undermine the company’s compliance and lead to failed audits due to inaccurate revenue recognition and reporting.

Essentially, unbilled receivables are a double-edged sword for SaaS businesses. On the one hand, they represent future revenue and growth potential. On the other hand, they can create challenges in cash flow management, forecasting, and financial reporting.

Challenges associated with unbilled receivables

Unbilled receivables, while an inherent part of the SaaS business model, aren't without their share of hurdles. Let's delve into a few of these challenges:

• Delayed cash flow and revenue gaps: Unbilled receivables can create a lag between service delivery and actual payment. The result? Potential cash flow crunches. This lag can hurt a company's ability to invest in growth and meet operational expenses.
  
  The discrepancy between recognized revenue and actual cash inflow can also create gaps in revenue reporting. It’s more difficult to gauge the company's true financial performance.
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• Tracking and collection difficulties: Keeping tabs on unbilled receivables can be tricky. This difficulty affects businesses with complex billing structures or high volumes of transactions.
  
  Manual tracking can be time-consuming, leading to missed invoices and billing errors. Collecting payments for unbilled receivables can also be hard, especially if billing is delayed.
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• Revenue leakage risk: The most daunting challenge, perhaps, is the risk of revenue leakage due to missed or forgotten invoices.

Delayed invoicing related to unbilled receivables can result in revenue leakage. This leakage, of course, impacts the company's bottom line. It's like leaving money on the table — a scenario no business wants to encounter.

Best practices for reducing unbilled receivables

Unbilled receivables may be unavoidable in certain situations. The good news is that proactive measures can help minimize their impact. Here are some best practices to consider:

• Automate billing processes: Manual billing is time-consuming and prone to errors. Automation can speed up invoice creation, reduce discrepancies, and free up your team to focus on broader strategies.
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• Real-time usage tracking: For usage-based billing models, real-time usage tracking is invaluable. It enables you to generate invoices promptly based on actual consumption, minimizing the gap between service delivery and billing.
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• Regular billing system audits: Even the most sophisticated billing systems can have glitches. Regular audits help ensure accuracy, spot potential issues, and prevent revenue leakage.
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• Usage data tracking: By diligently tracking usage data, you can anticipate billing needs and avoid delays caused by manual data collection or reconciliation.
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• Billing and usage tracking integration: Direct integration between your billing system and usage tracking tools fosters a streamlined process. This frictionless integration enables timely and accurate invoicing based on real-time data.

Remember, the goal is to align revenue recognition with billing as closely as possible. By adopting these best practices, you can minimize unbilled receivables, improve revenue flow, and guarantee a smoother financial journey for your SaaS business.

Next steps: How Orb provides management of unbilled receivables

We've journeyed through the intricacies of unbilled receivables, uncovering their impact in SaaS. Now, let's explore how Orb, the trusted billing platform for companies like Verceland Perplexity, can help you tackle these complexities head-on.

Orb is a done-for-you billing management solution designed to simplify your financial operations and reduce the headaches associated with unbilled receivables.

Here’s how Orb helps with managing unbilled ARs:

• Real-time usage tracking and billing: Orb's robust metering infrastructure provides granular visibility into customer usage data. This allows you to create invoices promptly based on consumption. We help minimize the gap between service delivery and billing.
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• Flexible pricing models and accurate invoicing: Orb's adaptability shines through its support for diverse pricing models. From usage-based and tiered to hybrid — we cover it. We ensure accurate billing, even for the most elaborate scenarios.
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• ASC 606 standards in mind: Orb's reporting capabilities simplify revenue recognition. We’ve built a reporting module with ASC 606 standards in mind. Automated calculations and real-time financial insights streamline your month-end close process.
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• Frictionless accounting integration: Orb connects with your accounting software, automating data flow and eliminating the need for manual reconciliation. This saves time and reduces the risk of revenue leakage due to missed or inaccurate invoices.

Ready to experience the Orb difference?

Take Orb for a spin and discover how we can transform your billing operations.