As a solar installation company, your primary goal is to help customers switch to clean, renewable energy while growing your business. However, it is important to understand how to recognize revenue at each stage of the solar installation process to ensure that you are accurately tracking your financial performance.
Proper Revenue Recognition
Revenue recognition refers to the process of accounting for revenue earned from a particular project or service. In the solar installation industry, revenue should be recognized as a percentage of completion at each stage of the installation process. Let's take a closer look at how this process works:
Contracting: ensure that you have a cost estimate for the entire project for each stage of the life of the contract. Take the estimated cost of each stage and determine what percentage of the total project cost each stage represents.
Contract Signed: The first step in the solar installation process is to sign a contract with a customer. This contract will outline the terms of the installation, including the system size, the cost, and the timeline for the project. At this stage of the contract, there is no revenue recognized as there is no work performed to satisfy any obligations of the contract.
Design: Your solar company will design a system that meets the customer's energy needs and fits the unique characteristics of their property. This includes determining the size and orientation of the panels, the type of inverter and other equipment required, and the placement of the panels on the roof or property. For this stage track the cost of the designer's labor hours and compare it to the estimates and adjust the estimates on future projects as needed.
Permitting: Before the solar panels can be installed, your installation company must obtain the necessary permits from your local government. This process can take several weeks, depending on the customer's location and the specific permits required. Track the costs of the permit runners and cash expenses paid to the permitting office against your estimates.
Installation: Once the permits have been obtained, your solar company will begin the installation process. This typically involves mounting the panels on the customer's roof or property, installing the inverter and other equipment, and connecting the system to the electrical panel. The bulk of the project costs are expected to occur at this stage, track the costs of travel, materials, installers and electricians needed to complete the installation against your estimates.
Final Inspection: After the installation is complete, the local government will send an inspector to check the system for compliance with local building codes and safety standards. This inspection typically takes place within a few days of the installation. Track the hours that it takes for an electrician to walk an inspector through the system, account for any disconnect/reconnects that occur.
PTO (Permission to Operate): After the final inspection, the solar company will apply for PTO from the utility company. This is the final step in the process, and it typically takes a few weeks for the utility company to grant PTO. Once the customer receives PTO, the project is complete, and you can recognize the remaining revenue associated with the installation and consider the install of the project completed.
Consequences of Early Revenue Recognition
Many solar installation companies are not familiar with this method of recognizing revenue and end up recognizing revenue too early in the process. Recognizing revenue too early can lead to bad financial management for a variety of reasons. Here are a few:
Overstating Revenue: If you recognize revenue too early, you may overstate your revenue for the period. This can make it seem like your business is performing better than it actually is, which can lead to poor decision-making based on inaccurate financial information.
Cash Flow Issues: Recognizing revenue too early can also lead to cash flow issues. For example, if you recognize revenue before the project is complete and you haven't received payment from the customer yet, you may have a cash shortfall that could affect your ability to pay bills or invest in future projects.
Contract Disputes: Recognizing revenue too early can also increase the risk of contract disputes with customers. If you recognize revenue based on incomplete work and the customer is not satisfied with the final product, you may have to refund some of the revenue, which can hurt your bottom line and damage your reputation.
Compliance Issues: Finally, recognizing revenue too early can also lead to compliance issues with accounting standards and regulations. This can result in penalties or fines, as well as damage to your reputation in the industry.
Conclusion
Recognizing revenue too early can have serious consequences for your business, including overstating revenue, cash flow issues, contract disputes, and compliance issues. It is important to follow the proper accounting standards and recognize revenue only when the work is complete and all conditions for revenue recognition have been met. Working with a qualified accountant or financial professional can help you ensure that you are recognizing revenue in compliance with all applicable regulations and standards and can help you avoid the pitfalls of recognizing revenue too early. GFT is an accounting and finance outsourcing service with years of experience in the solar space.