Revenue recognition in Productive determines how revenue from your jobs (budgets) is distributed over time. This process ensures that your financial reporting accurately reflects the actual work completed and expenses incurred.
It is essential to understand the various factors that influence revenue recognition, including service billing types, unit types, and related financial items such as time entries, bookings, and expenses.
Understanding these elements allows you to effectively manage your finances and gain accurate insights into your project's financial health.
We'll explore the details below!
Financial Items and Revenue Recognition
Four main financial items found in Productive affect revenue recognition:
Services
Fixed billing type services automatically generate revenue, while Time and materials billing type services do not generate revenue on their own. Time entries logged by users, bookings in Resourcing, and expenses associated with these services generate or assume revenue.Time entries
Only approved time entries contribute to revenue. Revenue is determined based on the tracked time multiplied by the service price.
Bookings in Resourcing
Only future bookings are considered for revenue recognition. Revenue is calculated based on the booked time multiplied by the service price.
Expenses
Only approved billable expenses affect revenue. The billable amount of the expense determines the revenue.
Service Configuration
When setting up your services, both the billing type and the unit type affect how revenue is recognized.
Service Billing Types
There are three service billing types in Productive, each influencing revenue recognition differently:
Time and materials services: These do not generate revenue on their own. However, the time entries, future bookings, and expenses tracked against these services will generate revenue.
Fixed services: These generate revenue on their own. The time entries, future bookings, and expenses tracked against these services may assume a part of the revenue.
Non-billable services: These never generate revenue, and neither do the associated time entries, bookings, or expenses. Simply put, you do not generate revenue with non-billable services since you do not charge them to your clients.
Service Unit Types
There are three unit types when setting up a service in Productive:
Hour: Time entries and bookings created against these services generate or assume revenue directly proportionate to the price set for these services. For example, if each hour is valued at $150, each hour tracked or booked generates or assumes $150.
Day: This is nearly identical to hours. Time entries and bookings created against these services generate or assume revenue based on your settings. This is set up in Settings > General, under Person-hours. For the purposes of this article, we will treat days as if they were hours.
Piece: Time entries and bookings created against these services will never generate or assume revenue. However, expenses will both generate or assume revenue (based on the billing type).
Time and Materials Services
With Time and materials services, revenue is recognized when the actual work is done (logged in Productive) and when you create future bookings in Resourcing.
The unit of work (hour, day, piece) dictates what can be tracked and recognized. For example:
By hour/day: Time entries and future bookings contribute to revenue.
Piece: Only expenses generate revenue.
Examples (click here)
Examples (click here)
TIME AND MATERIALS SERVICE BY HOURS OR DAYS
The service itself does not generate any revenue. However, if we were to log hours/days and book people for the service in Resourcing, we would start seeing recognized revenue in the reports (e.g. Financial items data source report shown below).
Note that we cannot track expenses against service set up this way, as its unit has not been defined as "Piece" but "Hour".
TIME AND MATERIALS SERVICE BY PIECE
The service itself does not generate any revenue, and no time entries and bookings can be made for it.
However, each expense tracked against this service generates revenue. Note that the expense needs to be approved (if expense approvals are toggled on) before it's recognized as revenue.
Fixed Services
Fixed Billing Type Revenue Recognition Recap
There are two options for recognizing revenue with fixed billing, set in Settings > Revenue recognition:
Fixed revenue is recognized on a single date:
All the revenue stays linked to the services.
The total revenue is recognized on a single date that you select.
Fixed revenue is spread across time:
The revenue is distributed over time.
As you log hours, days, expenses, and make future bookings, the revenue is allocated to these financial items.
The revenue is subtracted from the total fixed amount allocated to the services.
All remaining revenue, if there is any, will be retained on the service itself as surplus revenue.
Take a look at this article for a detailed explanation of the two options.
Here, we'll focus on the second option where revenue is set to be recognized as you log time, expenses, and make future bookings for the services.
The unit of work defines what can be tracked and recognized:
By hour/day: Time entries and bookings contribute to revenue.
Piece: Only expenses generate revenue.
Examples (click here)
Examples (click here)
FIXED SERVICE BY HOURS OR DAYS
The service itself generates the whole revenue and you can invoice the whole budget even before logging any hours or expenses there.
However, each time entry or future booking created against this service assumes revenue, meaning that the revenue is transferred from the service itself to the time entry or the booking.
This is important to note for later analysis, as the revenue linked to the service will decrease while the revenue associated with time entries and bookings will increase.
Note that we cannot track expenses against this service, as its unit is defined as "Hour" or "Day" rather than "Piece".
FIXED SERVICE BY PIECE
The service generates the entire revenue, however, only logged expenses assume revenue.
Please note that even if time tracking and bookings can be made against services with the Piece tracking unit, logging time and creating future bookings will not trigger transferring revenue to these financial items.
That means you cannot track revenue over time if you decide to log hours and days, and create bookings for the service set up in that way (Piece set as the billing type with time tracking and bookings enabled), so proceed with caution!
Non-Billable Services
Non-billable services do not generate revenue, only costs. Note that all internal budgets can contain Non-billable services only.
Depending on how and what you need to track when it comes to non-billable services, choose hour, day, or piece as the tracking type.
