Accounting from T&M to New Revenue Models
At Alten Capital we engage with technology services executives and management teams as their businesses evolve. One shift we see often is companies moving away from pure time-and-materials (T&M) work toward fixed-fee, milestone-based, and subscription or managed-service models. It's a smart commercial move, but it changes how the company has to think about revenue.
Under a pure T&M model, revenue is refreshingly simple. You bill hours, you recognize revenue, and billings and revenue essentially move together. As companies introduce fixed-fee projects, milestone billing, upfront deposits, or recurring contracts, that clean one-to-one relationship breaks. Let's take a crack at explaining why, and what it means for a company’s books.
The core idea is this: issuing an invoice and earning revenue are two different events, and they rarely happen at the same time. Billing schedules get negotiated for cash-flow reasons: a deposit here, a milestone payment there. But under US GAAP (ASC 606), you recognize revenue as you actually deliver the work, not when you send the invoice. The gap between those two timelines has to live somewhere, and that somewhere is a handful of balance sheet accounts worth knowing.
Deferred revenue (a liability). When you bill or collect ahead of doing the work, say a 50% upfront deposit, you haven't earned anything yet. That cash sits as deferred revenue, a liability, because you still owe the customer the work. As you deliver, you release it into revenue bit by bit. This is the account that trips up growing companies most: treating an upfront invoice as revenue overstates both the top line and profitability.
Unbilled revenue (an asset). The mirror image. On a fixed-fee or milestone project, you'll often perform work before you're allowed to bill for it. You've earned that revenue, so it gets recognized, but since you can't invoice yet, it lands in a contract asset rather than accounts receivable. Once you hit the billing milestone, it reclassifies to a normal receivable.
Accounts receivable and cash round out the picture. An invoice creates a receivable; collection turns it into cash. Neither event, on its own, creates revenue.
So the lifecycle of a fixed-fee engagement might run: take a deposit (deferred revenue goes up), deliver the work over several months (revenue is recognized and deferred revenue winds down), perform ahead of a later milestone (a contract asset builds), issue the milestone invoice (it becomes a receivable), and collect (cash). Revenue tracks the work, while the invoices and cash move around it.
Why does this matter beyond bookkeeping? Because gross margin, EBITDA, and ultimately the company’s valuation are all built on properly recognized revenue. A company that recognizes on billings rather than performance can show inflated profitability that doesn't survive diligence, and the correction can be an uncomfortable surprise. Getting revenue recognition right early makes the business easier to manage, easier to finance, and easier to transact.
As organizations evolve commercial models, it's worth investing in the accounting to match: a clear revenue recognition policy, monthly tracking of deferred and unbilled revenue, and a simple bridge from billings to recognized revenue.
Alten Capital invests in exceptional management teams to accelerate high-growth technology services businesses. Reach out to explore partnership opportunities.