Meaning
Financial accounting standards govern the reporting of earned revenue for which the customer has not yet been formally invoiced. Tracking unbilled receivables allows companies engaged in long-term projects to measure the value of work completed but not yet billed. This asset class is common in professional services and construction industries.
Revenue Recognition
Accounting rules require that revenue be recognized when the performance obligations are met, regardless of the billing cycle. When a project milestones is reached, the earned amount is recorded as an asset on the balance sheet. This process aligns reported earnings with actual work performed.
Working Capital
Unbilled assets require careful monitoring because they represent cash that is tied up in work in progress. When the volume of unbilled revenue grows faster than sales, it indicates that the company is spending cash to perform work but is slow to invoice customers. This condition can strain cash liquidity.
Billing Schedule
Project managers use billing milestones to convert unbilled assets into formal invoices as quickly as possible. When the contract allows, bills are sent to customers immediately upon reaching specified milestones. This conversion reduces the volume of unbilled assets and improves cash inflow, and the finance department monitors the age of unbilled amounts to ensure that no revenue remains unbilled for longer than the standard contract terms permit.