When you’re in the early days of your startup, revenue recognition feels pretty simple – money comes in, revenue goes up. Done. But as you scale, things get trickier. You’re dealing with subscriptions, multi-year contracts, deferred revenue and maybe even international customers. Suddenly, what seemed like a straightforward process turns into an accounting minefield.

If you don’t get revenue recognition right, it can distort your financials, make fundraising harder and even land you in regulatory trouble. Let’s break down when it becomes a problem and, more importantly, how to fix it.

Why Revenue Recognition Gets Messy for Scale-Ups

The biggest shift happens when your revenue model evolves. Maybe you’re now offering annual subscriptions, complex pricing structures, or performance-based contracts. The way you receive cash isn’t always the way you should recognise revenue.

Here’s where things typically go sideways:

1. You’re Recognising Revenue Too Early

Let’s say you sign a big contract and get a £100K upfront payment. Looks great in the bank account, but can you count it as revenue? Not so fast. If you’re delivering that service over 12 months, accounting standards (like IFRS 15 and ASC 606) say you need to recognise revenue over time, not all at once.

🚨 Why it’s a problem: Inflating revenue now might look good short-term, but it misrepresents your financials and can cause issues with investors and auditors later.

2. Your Subscription Revenue Isn’t Aligned With Service Delivery

If you’re running a SaaS or subscription business, cash and revenue rarely line up neatly. You might charge customers annually but deliver services monthly. If you recognise the full amount upfront, it’ll create wild revenue swings that don’t reflect reality.

🚨 Why it’s a problem: Misreporting subscription revenue can give investors a misleading picture of your growth and stability.

3. Deferred Revenue Is Getting Overlooked

Deferred revenue happens when customers pay upfront for a service they haven’t fully received yet. You might think, “Great, we’ve got the cash,” but from an accounting perspective, that money isn’t fully yours yet. If you don’t track it properly, your revenue numbers could be way off.

🚨 Why it’s a problem: Investors want to see a true picture of revenue versus cash flow. If your financials aren’t clean, it raises red flags.

4. Discounts, Refunds, and Credits Are Messing With Your Numbers

Offering discounts? Issuing refunds? That’s normal. But if you don’t handle them properly, your revenue can be overstated, and your financials won’t tell the full story.

🚨 Why it’s a problem: You could be over-reporting revenue without realising it, which creates a false sense of financial health.

How to Fix Revenue Recognition Before It Becomes a Bigger Issue

So, how do you keep revenue recognition clean, compliant, and investor-friendly? Here’s what you need to do:

1. Align With Revenue Recognition Standards (Even If You’re Not “Big” Yet)

Whether you’re aiming for an IPO or just trying to run a smooth operation, you’ll need to comply with regulations such as IFRS 15 (global) or ASC 606 (US). These rules say revenue should be recognised when value is delivered, not just when cash hits your account.

✅ Fix: Work with a finance pro (or fractional CFO) to ensure you’re following these standards. It’s easier to get it right now than fix a mess later.

2. Track Deferred Revenue Properly

If you get paid upfront for services delivered over time, that’s deferred revenue. You need a system to track it and move it into revenue as you fulfil your obligations.

✅ Fix: Use an accounting tool like Xero, QuickBooks, or NetSuite to automate deferred revenue tracking.

3. Automate Revenue Recognition for Subscriptions

Manually tracking monthly revenue from annual contracts? That’s a nightmare waiting to happen. Automate it.

✅ Fix: Tools like SaaSOptics (for SaaS businesses) or Chargebee (for billing automation) help allocate revenue correctly over time.

4. Keep Your Cap Table and Revenue Recognition Aligned

If you’re raising money, investors will scrutinise your revenue model. A messy cap table and confusing revenue tracking are two surefire ways to slow down a funding round.

✅ Fix: Make sure your revenue recognition policies align with how investors expect to see financials.

5. Review Contracts Before Signing

The way contracts are written can impact how you recognise revenue. For example, if you agree to deliver services over two years but get paid upfront, your financial reporting needs to reflect that.

✅ Fix: Get a finance expert to review customer contracts before signing, ensuring revenue recognition aligns with delivery.

Get Ahead of the Problem Now

At some point, investors, acquirers, or auditors are going to take a close look at your revenue numbers. If your revenue recognition is inconsistent or inaccurate, it can delay funding rounds, lower valuations, or even cause regulatory headaches.

The good news? This is 100% fixable. With the right systems, automation, and expert guidance, you can ensure your revenue recognition is rock solid – giving you and your investors confidence in your numbers.