If you sell subscriptions, SaaS, or service contracts, you can hit a strange moment in your board pack. Cash is up, invoices look healthy, but profit dips and your metrics feel “off”. That usually isn’t a sales problem. It’s Revenue Recognition.
Founders run into this most when annual prepay deals land, bundles get messy, or a contract has vague delivery terms. Investors and buyers will ask how you recognise revenue, and auditors will test it. The aim is simple: revenue should reflect what you’ve delivered, not what you’ve collected.
In the UK, the logic is set by IFRS 15 (and even if you report under UK GAAP, the same thinking shows up in diligence and fundraising). This guide gives plain-English rules, practical examples, and the traps that most often trip up scale-ups.
Revenue Recognition in plain English, what counts as revenue and when
Revenue is recorded when you’ve delivered the promised service or product to the customer. If you’ve been paid but still “owe” service time or deliverables, that money is not revenue yet. It’s usually deferred revenue (also called a contract liability).
This timing matters because it changes your reported growth rate, gross margin, EBITDA, and sometimes your covenant headroom. It also affects how confident you can be in your forecast. Clean revenue schedules stop uncomfortable surprises later, especially when you start reporting to a board or preparing for a fundraise.
A simple subscription example:
- Customer pays £12,000 upfront for 12 months of access starting 1 January.
- You recognise £1,000 revenue each month as you provide access.
- The remaining balance sits as deferred revenue until earned.
Here’s how that looks at a high level:
| Date | Cash received (bank) | Revenue recognised (P&L) | Deferred revenue balance |
|---|---|---|---|
| 1 Jan | £12,000 | £1,000 | £11,000 |
| End of Jan | £0 | £1,000 | £10,000 |
| End of Dec | £0 | £1,000 | £0 |
Cash received is not revenue, deferred revenue explained
Three events get confused all the time:
- Invoicing: you raise a sales invoice, which creates a trade debtor (or reduces it if paid).
- Cash collection: money hits the bank.
- Revenue recognition: you record revenue as you deliver.
Annual upfront billing is where the confusion shows up fastest. The bank looks great, but the P&L should only show the portion you’ve earned so far. The rest sits on the balance sheet as deferred revenue.
This also changes internal conversations. Profit may look lower in the short term when you do a big prepay push, because you haven’t “earned” most of that cash yet. It can also affect tax planning discussions with your accountant, since tax rules and accounting timing can differ. Don’t treat the revenue schedule as a tax plan, treat it as the truth about delivery.
The 5-step contract approach (IFRS 15) without the jargon
IFRS 15 uses a five-step approach. You can apply it without turning your finance team into policy writers.
- Identify the contract: what was agreed, with enforceable rights and payment terms.
- Identify the promises: list what you’re really providing (access, onboarding, support, a report, an implementation).
- Set the total price: include fixed fees, plus variable fees that are expected to be earned.
- Allocate the price: split the price across promises in a fair way, often using standalone selling prices.
- Recognise revenue as delivered: record revenue when the customer gets the benefit and you’ve performed.
The key test is control and benefit. If the customer is getting the service over time (like SaaS access), revenue usually follows time. If the customer gets a completed deliverable at a point in time (like a finished report), revenue often lands at completion.
Subscriptions and SaaS contracts, where startups usually get Revenue Recognition wrong
Subscription businesses are predictable on paper. In real life, contracts include onboarding, discounts, usage fees, and mid-term changes. The wording matters, but so does what you actually do for the customer.
A good habit is to treat every new deal like a short story: What did we promise, when do they get it, and what evidence proves delivery?
Bundled deals, setup fees, support, and onboarding that change the timing
A “performance obligation” is just a separate promise. Some promises are distinct deliverables. Others only exist to support the subscription.
Two common scenarios show why timing differs:
Example 1 (setup that supports the subscription)
You charge a £1,500 setup fee for creating an account, configuring a workspace, and enabling billing. The work is light, and it doesn’t give the customer a separate outcome without the ongoing service. In many cases, that fee should be recognised over the subscription term, because it’s tied to providing access.
Example 2 (distinct implementation project)
You charge £15,000 for an implementation with defined deliverables, a project plan, and a signed handover. The customer can benefit from that work on its own, even if the subscription ends later. That implementation may be recognised as delivered (often by milestones or at completion), while the SaaS access is recognised over time.
The trap is booking all setup or onboarding fees immediately because they’re “non-recurring”. Recurring versus non-recurring is a sales label, not an accounting rule.
Free trials, discounts, and usage-based pricing (variable consideration)
Promos and variable pricing are where revenue schedules get fragile.
Common cases include first month free, credits, usage overages, price protection clauses, and refund policies. These features affect the “transaction price”, which then affects timing and allocation.
A practical rule that keeps you safe: only recognise variable amounts that you’re unlikely to reverse later. If overage revenue is volatile, estimate it carefully, use consistent logic, and update it monthly as actual usage comes in.
This needs documentation, not perfect maths. Write down the assumptions, the data source (product logs, billing system), and who approved the method.
Contract changes and renewals, when it is a new deal vs a change to the old one
Upgrades and add-ons sound simple until you try to chart revenue by month.
Typical changes include adding seats mid-term, upgrading tiers, extending the term, or adding modules at a discount. The decision usually comes down to two questions:
- Is the extra service distinct from what’s already being provided?
- Is the added price close to the standalone selling price?
If the answers are yes, it may be treated like a new mini-contract. If not, you often adjust the existing revenue schedule and spread remaining revenue over the updated period.
A quick warning: side emails and “we’ll true-up later” messages cause real pain in diligence. If the invoice, contract, and delivery reality don’t match, the acquirer or auditor will assume the worst.
Common traps in service contracts and mixed deliverables (SaaS plus services)
Many UK scale-ups sell software plus implementation, managed services, or advisory. This is where Revenue Recognition can flip between “over time” and “point in time”, sometimes within one deal.
Over time recognition is common when the customer benefits as you perform (for example, a managed service each month). Point in time recognition is common when the customer only benefits at the end (for example, a completed report or delivered asset). Your contract terms and evidence decide which one fits.
Milestones, acceptance clauses, and vague scopes that delay revenue
Acceptance language can block revenue even when the work is done.
Risky wording looks like “subject to client sign-off” with no criteria or time limit. If the customer can delay acceptance without clear rules, you may have to hold revenue longer than you expect.
Simple fixes you can add to contracts and SOWs:
- Objective acceptance criteria (what “done” means).
- A clear list of deliverables.
- A timeline for review, with deemed acceptance if no response.
These changes don’t just help accounting. They reduce disputes and speed up cash collection.
Non-refundable upfront fees and retainers, why they often cannot be booked immediately
“Non-refundable” doesn’t always mean “earned”.
Retainers for ongoing access to a team are often earned over time, even if paid upfront. Similarly, an upfront fee that relates to future service usually needs to be spread across the service period.
A one-off deliverable can be recognised at completion if it’s genuinely separate and you can prove delivery. If the fee mainly secures access or readiness for future work, it usually follows the service timeline instead.
A simple Revenue Recognition checklist for UK scale-ups (what to set up now)
You don’t need a complex system to get this right. You need a repeatable monthly process that stands up to questions.
A lightweight close routine:
- Review new and changed contracts, not just invoices.
- Map each contract to deliverables and recognition timing.
- Maintain a revenue schedule (a waterfall) by customer and promise.
- Reconcile deferred revenue month-on-month (opening, billings, recognised, closing).
- Keep an evidence file for delivery (project sign-offs, usage logs, support coverage period).
This is the sort of pack VCs, buyers, and auditors ask for because it turns revenue from a story into a trail of proof.
What to document for each contract so you can defend it in due diligence
Keep a minimum “contract pack” per customer:
- Signed contract, order form, and SOW (if any)
- Pricing, discounts, and the reason for them
- Deliverables list and service period
- Standalone selling price support for key items (even a simple internal price list helps)
- Contract modification history (who approved, when it changed)
- Refund, credit, and termination terms
- Monthly revenue schedule and deferred revenue movement
If it isn’t written down, it won’t count when diligence gets tight.
How Consult EFC helps, clean policies, better close, and investor-ready numbers
Consult EFC supports UK founders who want reliable numbers without slowing the business down. That usually includes setting a clear Revenue Recognition policy, reviewing subscription and SOW templates before they cause problems, building a revenue waterfall and deferred revenue tracking that matches your billing system, and tightening the monthly close so reporting stays consistent.
When fundraising or audit prep starts, this work stops revenue questions from turning into valuation pressure.
Conclusion
Revenue Recognition follows delivery, not cash, and that one rule drives most outcomes. The traps tend to cluster around bundles, variable pricing, contract changes, vague acceptance terms, and upfront fees. Review your top 10 customer contracts, then trace each one to a revenue schedule you can explain in two minutes. If you want a fast, founder-friendly clean-up, Consult EFC can review your contracts and policies and get your numbers ready for the next board pack, audit, or fundraise.
