Revenue Backlog Defined
Revenue backlog is the value of contracted revenue that has yet to be recognized in your SaaS or subscription agreement. While Revenue backlog can occur in traditional and subscription businesses, the accrual nature of revenue recognition in subscription models results in almost all subscription companies having revenue backlog.
How do you calculate backlog?
Revenue Backlog is the sum of the unrecognized revenue in the schedule of revenue over term of a SaaS or subscription agreement. It can include revenue for both subscription and non-recurring services such as training and implementation.
Revenue backlog can and does include contracted or committed revenue that is not yet recognizable due to pending customer acceptance criteria, incomplete delivery of professional services, or other accounting rule. Revenue Backlog can include the future value of active subscriptions or pending subscriptions. In a manner consistent with standard revenue recognition practices, you should only include revenue in revenue backlog if there is a strong argument or evidence that both you and the customer will fulfill the obligations of the subscription or license agreement.
Is revenue backlog deferred revenue?
Revenue backlog is not deferred revenue. Revenue backlog is a non-GAAP reporting number, and thus does not appear on the balance sheet. Revenue backlog is a financial measure that many organizations manage and report to senior management and boards. It is a measure of total contract value that has yet to reach the income statement and provides a type of “income backlog”.
Since revenue backlog calculation is simply about revenue and does not consider invoicing, it can be significantly different from deferred revenue.
See Deferred Revenue vs Revenue Backlog for illustrations on both concepts.
To get a grip on this new metric, let’s consider the basic example of a generic SaaS company that sells a cloud service and a related support contract to a customer, both for a one-year period. Suppose the customer prepays the full year’s worth of the cloud service in the amount of $2,400. Separately, the customer agrees to be billed $25 on the first day of each month (with the transaction to be paid automatically via credit card) for the duration of the one-year support contract.
After the first three months, representing one business quarter, the SaaS company will record one-fourth of the $2,400 cloud service, or $600, as revenue on its income statement. The remaining $1,800 of services, which has been billed but not earned, can be found on the deferred revenue account on the balance sheet.
The company will also record $75 of support services on its income statement for the three completed and paid months. Since nine out of 12 months remain in the business year, the company has a revenue backlog of $225 ($25 multiplied by 9) arising from the support contract.