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Here is our take on revenue backlog, its definition, formulae, and usefulness in your SaaS business.
The ultimate stake of a SaaS business lies in the number of successful subscriptions it can generate in time. The amount of revenue generated by each subscription can sometimes become quite difficult to gauge. This is where revenue backlog occurs in a SaaS business.
Several SaaS businesses are not huge fans of tracking the revenue generated by each subscription. However, revenue backlog calculations are necessary for a B2B SaaS business to track its overall growth and how far it has reached since its inception.
In the forthcoming sections of this write-up, I will devote my attention to three things:
We have a lot of ground to cover, so let us get started with the definition of revenue backlog.
In layman’s terms, the amount of revenue that is yet to arrive from the subscription of your product contract that is yet to be completed is termed as revenue backlog. It is the unrecognized revenue that is generated from the subscription business. Especially for SaaS businesses, revenue backlog can come primarily from recurring revenue. But, there are times when it can even include revenue from other sources like investment or one-time investment sales.
The peculiar thing about revenue backlog is that it does not come in the balance sheet. However, most organizations keep it as a number to be reported to C-Suite executives. That is because it provides valuable information about the cumulative figure of all contracts that your business model can undertake.
Such revenue backlog includes the sum of money that the customers have agreed to pay; however, it has still not been invoiced. It can be due to the long-term nature of the invoice. Such invoices are sent as separate periods provided by you, like weekly, monthly, quarterly as per your wish.
Revenue backlog can occur in the B2B SaaS business as a part of:
Making revenue backlog calculation seems to be a fairly straightforward task to an outsider. The only thing required is summing up the values of your current contracts. But, this is where it gets interesting. The tricky part is to include which values need to be put into the calculation.
This can include:
Once these things are added up, you need to do two calculations.
The only thing required to help project your revenue backlog calculation is satisfactory evidence that each customer will fulfill their obligations and your company can meet their terms.
The things that I have mentioned above really make revenue backlog a very interesting concept for B2B SaaS business. In the first instance, you might say that revenue backlog is a fairly minor calculation that is not something that will make B2B SaaS team overworked. But, revenue backlog is crucial when it comes to making SaaS valuation.
Having a firm grip over your revenue backlog can make a huge difference between a good and a bad valuation. The first thing that comes into mind when it comes to valuing your B2B SaaS business is your acumen of valuing the contracts you are signing compared to your stated aims. The simplest way of tracking it is by keeping a close tab on the difference between your revenue target and your revenue backlog.
But, you cannot possibly use deferred revenue in place of revenue backlog. The reason is revenue backlog remains constant while deferred revenue fluctuates a lot. Buyers prefer to use revenue backlog as a metric to adjudge the performance of your business so far. It also considers the amount of risk in your revenue forecast.
Revenue backlog gives a comprehensive overview of your approach to new business, financial management, and even how you manage customer relationships across their tenure.
The very first thing that you need is to recognize that there is a revenue backlog in your B2B SaaS business. Even when your whole B2B SaaS business is standardized in terms of recognizing revenue or even automated, it takes time to keep track of revenue. Your financial team needs to spend a lot of time deciphering the numbers and arriving at a conclusion. They need to be meticulous in their approach while arriving at the results.
In addition to the time required to compile these reports, the chances of error in these reports are high. We are talking here about revenue, and even a small mistake can have huge consequences.
By investing in an effective revenue recognition system with AI and algorithm-supported solutions, you can curate precise subscription financial metrics with minimal revenue backlog.
Several B2B SaaS companies take revenue backlog calculations quite lightly. However, this is where they are making a huge mistake. The difference between your revenue target and your revenue backlog showcases the revenue that needs to be crossed in the new sale. Since backlog in revenue is locked-in, it is a good indicator of your business performance. It reflects the amount of risk in your revenue forecast.23
By having an in-depth understanding of your revenue backlog, you are sending the right messages about your financial management of the business. Portraying revenue backlog in the most precise manner helps make strong valuations of your B2B SaaS business over time.
Dattatraya Shetty is an IT Professional with 2 Decades of experience in areas of Product Development, Implementation & Service Delivery Management. As the Head of Implementations and SOC Compliance in Smartkarrot he is on a mission to provide relishing customer experience.
Published February 25, 2022, Updated February 28, 2023
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