Stage 5: Maturity
Recognized revenue is the reality check that your finances need as your company matures. Now that you're taking on more customers and bigger, higher-paying customers, the new cash in the bank will make you want to celebrate. Accounting for recognized revenue will help you avoid false victories and misguided decisions.
Your recognized revenue is the payment from your customers that corresponds with services that have actually been delivered. If a customer pays you upfront for an annual subscription, you can only count portions of their payment as recognized revenue as you deliver your service week by week, month by month, et cetera.
As you acquire larger and more complex accounts in the Mature stage of your company's development, it is especially important to establish a policy for measuring recognizing revenue. Otherwise you risk counting your deferred revenue as money you've earned, when you should really consider it a liability until you've delivered on the promised service.
Mixing up recognized revenue and deferred revenue is a deadly cocktail that will lead to bad business decisions. Operating under the assumption that you have more money that you really do will have widespread grim consequences for your company, your employees, and your customers. You could undo years of hard work by failing to keep these metrics straight.
How this aligns with your objectives
You'll know you're here when you've successfully built the machine that builds your product. But you're far from cooling your heels. Even as your company gets older, you'll want to follow the advice of Andy Grove and stay paranoid.
Now you want to make sure your successful processes are repeatable. You might consider making playbooks for your processes. If they're both repeatable and scalable, you might look for outside interest or consider expanding internationally.
The bottom line is that although you may be checking off goals and passing benchmarks, you need to kindle the fire of ambition to avoid complacency. That means being honest about your incoming revenue and staying hungry to improve those numbers and to continue providing top service to your customer base.
This is how to calculate recognized revenue:
But beware: calculating recognized revenue by hand can get extremely complicated and confusing. There are many places for human error, so it's helpful to automate the process to make sure your data is correct.