Deferred revenue: A threat to field service solvency

These days, preventive maintenance packages offer just as much to customers as to the field service providers selling them.

Customers get a little peace of mind and contractors benefit from a whole new revenue stream, which many desperately need as of late. According to a report from the Technology Services Industry Association, many field service companies have been stuck in a revenue rut for at least the past two years – more than 70 percent of businesses polled had struggled with profitable revenue growth during that time.

However, if bookkeepers don't know how to properly account for preventive maintenance packages or other subscription-based service products, their businesses could be in for an unpleasant surprise down the road. Avoiding these issues starts with the development of an in-house system designed to receive deferred revenue.

What is deferred revenue?
Essentially, deferred revenue includes any advance payments for products or services that have yet to be rendered.

Here's a quick example: Let's say you sold a customer a maintenance package for an HVAC system that costs $120 per year, or $10 per month. As tempting as it is to take that $120 and put it right in the bank, it's not the same as, say, selling a customer an HVAC filter for $30. You have to divide up the $120 payment into 12 chunks, one for each month, then treat each chunk as revenue only after you've made good on one month of service. As soon as January becomes February, for instance, $10 should move from the long-term liability section of your balance sheet into actual earned revenue.

Make George Washington proud by accounting for deferred revenue.Make George Washington proud by accounting for deferred revenue.

Why is deferred revenue necessary?
Simply put: You haven't technically earned that money yet. Considering deferred revenue as actual revenue artificially inflates the value of your business, which could accidentally lead you to act or invest in ill-advised ways because you don't have the revenue to support such decisions.

Furthermore, what happens if a customer asks for a refund and you already spent the sum of their maintenance agreement? Those costs will have to come from somewhere. If you don't treat deferred revenue like the liability it is, that somewhere will be your back pocket.

How can field service providers assign and account for deferred revenue?
Basically, these businesses have two options: crunch the numbers manually or find enterprise software that does the trick.

More than just a solution for empowering contractors and field technicians, Service Fusion field service management software can also assist in backend administration and bookkeeping, including processing deferred revenue. Service Fusion software syncs with QuickBooks, so when customers pay for certain products designated as deferred-payment products, QuickBooks automatically marks those as a liability until the time comes to move that money to earned revenue. Everything is automated and nothing falls into the wrong column.

For more information on how Service Fusion field service management software helps business keep track of their financials, request a free demo today.

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