What is SaaS Revenue Backlog?

SaaS revenue backlog refers to the money that a company has not yet billed but that it has more or less ‘committed’ to earning based on existing contracts.  This situation particularly applies to businesses that are subscription-based or those that are project-based, as revenue is earned over the duration of service delivery.  

While revenue backlogs can help gauge the potential of future digital business opportunities and the overall health of the company, it is important to remember that these are just projections, and the actual outcomes may vary.

A revenue backlog refers to the estimated earnings to be realized, whereas deferred revenue refers to the income realized and received.  

A revenue backlog, on the contrary, is a future revenue opportunity arising from copyright subscriptions, new investments, or the sale of equipment or services that have not yet been invoiced or recognized in the records following US GAAP and IAS.  

Deferred revenue, on the other hand, refers to the amount paid for a product or service that has not yet been rendered.  This income is recognized as revenue only on completing an underlying transaction, that is, on delivering the goods or services.  

The major difference between the two relates to the timing with which the revenue backlog is anticipated.  Whereas revenue backlog reflects the potential of making future earnings, deferred revenue is income hypothetically already earned and usually cash-based.

Revenue backlog is one important component in SaaS businesses as it considers revenues that are yet to be recognized in the existing customer contracts.  The reason why revenue backlog is important is because of the popularity of the subscription-based model. 

Though an organization keeps a relatively accurate picture of its revenue over a period, revenue can only be recognized, in strict accounting practice, after receipt of cash from a customer/somebody.  

Revenue backlogs remain highlights for delivering developers’ credibility, guaranteeing business stability, and supporting efficient resource distribution.

Monitoring revenue backlog has notable advantages for businesses, yet there are also some difficulties.  It is necessary to comprehend both to make proper decisions as far as backlog management is concerned. 

Advantages: 

• Understanding future cash inflows as indicated by revenue backlog enables informed resource allocation and optimized cash-flow management. 
• Reference to revenue backlogs based on potential sales can improve the reliability of financial predictions, but this may also have limitations depending on market changes and other factors.
• Tracking the revenue backlog can alert businesses to customers with a higher risk of churning.
• Revenue backlog tracking provides businesses with a method to comply with accounting standards for revenue recognition.

Cons:  

• Revenue backlogs pose various potential risks, ranging from customer defection and industry fluctuations to delivery delays.
• To ensure accurate analyses, it is essential to maintain precise revenue backlog data, as inconsistencies can lead to misinterpretations.
• The tracking of revenue backlogs is an area that calls for specific resources and processes.

It is well known that revenue backlog is an important metric in achieving revenue goals.  By estimating revenue backlog, SaaS businesses can evaluate the concentration risk of their customer base.  This helps identify possible churning points where clients stop or reduce their contracts.  

Revenue backlog measurement deals with identifying unearned committed revenue.  This integration attempts to improve customer success and sales efforts through the integration of revenue backlog into customer-related processes.  Depicting revenue backlogs in the appropriate management leads to truthful representation of the current and future state of the company.  

Employing the described methods could potentially impact the likelihood of businesses reaching revenue goals; however, numerous other factors can also contribute to success.

An example of revenue backlog classification would be based on a SaaS business that has obtained a contract valued at 120,000 dollars for 12 months.  In this situation, the company’s backlog would contain the full amount of the contract, which is one hundred and twenty thousand dollars.  This backlog could also be further segmented by customer, contract size, or time to evaluate risks and discover growth opportunities.  

For instance, imagine that a customer signs up for a one-year plan costing $1200 and pays for it in installments every month.  After the first installment is paid, there is a revenue backlog of $1100 due to this arrangement.  A SaaS company with a twelve-month contract of 120,000 dollars features a revenue backlog of 210,000 dollars on existing contracts, assuming that all services are rendered as scheduled.