What You Need to Know About Deferred and WIP Revenue Management in NetSuite OpenAir

One of the powerful features of NetSuite OpenAir is the ability to separate invoicing from revenue recognition. These features make it possible to implement billing scenarios that fit your business model.  But, without the proper controls and understanding, it can also complicate revenue management, revenue realization, and financial reporting.

This is where work-in-progress (WIP) and deferred revenue come into play. These play an important role in helping professional service organizations accurately manage things like pre-payments, deposits, managed service contracts, fixed payment schedules, fixed fee milestones, and annual subscriptions.

WIP vs. Deferred Revenue

What is WIP, and what is deferred revenue, then?

WIP originated as a manufacturing and supply chain term that referred to work-in-progress; and while the idea of a partially assembled car may not apply to a professional services organization, the concept of invoicing and payment for on-going work or partially completed work certainly does.  Within OpenAir, WIP refers to a summary reporting value where you have taken more revenue than you have invoiced. An example might be when you have taken in $150,000 but only invoiced $100,000. In that case, you would have a WIP amount of $50,000.

WIP = Revenue > Invoicing

What about when you have invoiced $150,000 but only recognized $50,000. This is the opposite case from WIP and would involve the summary reporting value deferred revenue. This would be where you’ve billed for a project but haven’t fully completed the work involved.

Deferred = Invoicing > Revenue

Invoicing and Reporting Scenarios with WIP or Deferred Invoicing

Understanding the difference between WIP and deferred revenue is important, but meaningless in practice if you don’t know how to implement the key scenarios they apply to within your OpenAir PSA. We discuss, below, how to get started managing these scenarios in OpenAir. These scenarios, and others, are presented in greater detail in our January recorded webinar, Deferred/WIP Revenue Management in NetSuite OpenAir, including specifics on how to set up your billing rules and charge stages to keep your invoicing and reporting clean and accurate.

Pre-payments

Simply put, this scenario is when a customer prepays for hours of work at a specific rate. Work is then burned down from that pre-paid amount. There are a few ways that pre-payments are set up in OpenAir, and that set up is primarily driven by if the client will receive an invoice for hours used. In each of these cases, billing rules and charge stages play an important role.

Pre-paid with Month $0 Invoices

This scenario is when your clients are pre-paying for a certain number of hours in the month and receiving an invoice that reflects the hours, but not cost, associated with the pre-paid work. You may also have an agreement for an hourly rate over and above those pre-paid hours – those need to be accounted for as well.

The concern here is in keeping invoicing separately from revenue reporting. Billing rates and rules and charge stages within OpenAir are crucial to ensuring that no double reporting of revenue occurs.

Regarding WIP and deferred revenue, this scenario involves pre-billing, where the amount has already been billed, but the revenue is taken over the month. This is a deferred revenue situation, at least until the hours that were pre-paid have been used.

Pre-paid with Month with Actual Hours and Costs

Similar to the previous scenario, how this is handled is driven largely by what the customer will see on their invoice and how to prevent that revenue from being double reported. Here, the customer receives an invoice that shows actual hours and the costs associated with those hours, but the pre-payment is applied and the invoice total is zero.

Again, this is where charge stages within OpenAir can allow for the creation of invoices that show what the client needs while maintaining accuracy with your financial reporting. OpenAir’s retainer feature is important in this case, as it allows you to create a customer-specific dollar amount that can then be applied to your invoices, similar to a PO.

Like the previous scenario, this would be categorized as deferred revenue until the hours are used, depending on how you’re taking the revenue.

Pre-paid with No Invoice

This is the cleanest of the pre-paid scenarios since it doesn’t require any custom calculations for billing and reporting. In this case, the client pre-pays but doesn’t receive an invoice at all.

Like the $0 monthly invoices, this requires some billing manipulation using billing rules to keep both the invoicing or billing side and the reporting side clean and accurate. As with the previous examples, this would be deferred revenue until the pre-paid hours have been used.

Managed Services

Managed service invoicing and reporting is a common scenario for many professional services organizations using OpenAir. The client receives a certain number of hours a month, and anything above those hours is billable. The difference between this and the previous scenarios is time – in most cases, the number of hours allowed for the client is time-blocked to a month.

OpenAir handles managed service invoicing well. Billing uses a fixed fee on date rule with an amount per month that is billed, and that is simply repeated. A time billing rule with a $0 rate card is used for allowed hours, and beyond the hours cap the invoice switches to an overflow time billing rule and appropriate rate card.

Revenue is taken as the managed service repeating amount unless the cap is exceeded. When that happens, the revenue is taken for the overflow. There is no WIP or deferred revenue in this scenario.

Fixed Fee Milestone Invoicing

Fixed fee projects that are paid against milestones is a common scenario, as well. This happens when your client pays based on any of several milestone options, such as half upfront and half on delivery, a mid-project milestone payment, or alongside specific project deliverables.

Billing in this scenario would accommodate the contract agreement. Revenue recognition would follow GAP and 606 compliance and involve percent complete.

Reporting, of course, can be more complex than the previous examples. WIP and deferred revenue will fluctuate throughout the project lifecycle. You may bill upfront and have hours apply to that payment, or you may be doing work that hasn’t been invoiced yet. Depending on the hour, percent complete, and your contractual agreement, you will likely see both the WIP and deferred revenue values come into play.

Annual Subscriptions

Many software companies have turned to using annual subscriptions and managing those invoices and payments with OpenAir. This is a straightforward scenario, where the payment would be invoiced and paid upfront. The revenue recognition would be ratable, with a fixed fee repeating monthly amounts reported on.

Because the payment is made at the beginning of each subscription period, the revenue would be deferred with a deferred balance each month through the end of the contract term.

Conclusion

WIP and deferred revenue are both summary values within OpenAir reporting and invoicing that may come into play depending on the engagement, the customer agreement, and your business practices. If you’re using one of the above scenarios, or one of the other scenarios that we discuss in our monthly webinar on WIP and deferred revenue, you’ll want to understand how to properly configure your OpenAir PSA to keep your invoicing straight and your revenue reports accurate.

If you have additional questions on how to configure the appropriate billing rules, charge stage, or reporting within your NetSuite OpenAir platform, give us a call. Top Step has helped countless professional services companies set up their PSA to simplify their revenue reporting.