Crowdfunding Best Practices

First Phase: Campaign completed, and funds received

Alright. You're stoked! All your hard work has paid off. We know how much goes into a successful crowdfunding campaign. Everything from building pre-campaign email lists to creating ten prototypes before getting it right. But the work has only begun. Now you have money from backers, and you've made promises to fulfill rewards (usually in the form of your product). Things got real.

Accounting for the funds from your crowdfunding campaign is not as simple as a one-time revenue entry, if you are trying to account for things “correctly”. We wish a one-time entry would would work, but it doesn't. As stated on Kickstarter, and similar to other crowdfunding platforms, creators' “fundamental obligation to backers is to finish all the work that was promised. Once a creator has done so, they've fulfilled their obligation to their backers”. (Click here, for more about creator obligations).

So, when you receive funds, you are now under an obligation, or liability, to fulfill the promised reward. All the money you received has not been technically “earned” at this point. Therefore, these funds are recorded as “unearned revenue” (a current liability), until product has shipped. This is referred to as “deferring revenue”. There is a simple method or more complex method to defer your crowdfunding campaign revenue.

Simple method of deferring revenue

To keep the bookkeeping simple, you can just record the amount that hits your bank account from your crowdfunding campaign:

Complex method of deferring revenue

Although the simple method works, in reality there are fees that occur between the amount that was pledged on the crowdfunding site and the amount that hits your bank account (so yes, don't be surprised when the deposit is less than you are expecting). Incidentally, here is an example of how we would record the journal entry for Crowdfunding merchants:

Comparing the methods

Which method do we recommend? In both methods, your ultimate impact to net income, and therefore your taxable income, is the same. Therefore, if you are only recording the journal entry for these purposes, then keep it simple and record only the net amount you see deposited in your bank account.

On the other hand, if you are planning to sell your company soon, or you simply appreciate a higher level of detail, then go with the more detailed method. Many business valuations are based on top-line revenue, and the total amount raised by your crowdfunding campaign was rightly raised by your company, as revenue. You would want this full amount reflected, resulting in a higher valuation for the sale of your business. We have seen the difference between the total amount raised and the amount deposited equate to several hundred thousand dollars for a company that was looking for an exit. This can be a big deal!

Second Phase: Product sourced, and ready to ship

After receiving the campaign funds, you should then be running around like crazy to source and fulfill your promised reward. Sourced product that you are holding onto as inventory should be recorded as inventory, on the balance sheet:

Unfortunately, the crowdfunding platforms don't collect your backers' shipping addresses for you. You will need to be collecting shipping addresses during this phase. To do so, something like BackerKit, comes highly recommend if you are not already using it. BackerKit is a great resource to help creators with all their campaign needs.

Third Phase: Shipping product

After sourcing your product and collecting addresses, you are ready to ship your product. From our experience, usually you have received about 80% of your backers' shipping addresses when you make your first shipment, and the other 20% will trickle in over the next few months. When product is shipped, then you can record “revenue” on your books, and decrease your current liability of “unearned revenue”. This process looks different, depending on whether you used the simple method or complex method described above.

Simple method for recognizing revenue

If you used the simple method of recording “unearned revenue”, then the journal entry to recognize that “revenue” is simple as well:

You may be thinking it would be ridiculous to make a journal entry for each backer's order that is fulfilled, and you're right. We are accountants, but we aren't that crazy! We like to follow this monthly process:

1. Calculate the average amount of revenue per backer (total revenue you are tracking divided by number of backers)
2. At the end of each month, use BackerKit to see how many backers you have shipped product to
3. Multiple the number of backers (step 2) with the average amount of revenue per backer (step 1), for your monthly revenue
4. Record a monthly journal entry for “revenue” and “unearned revenue” (based on the calculation in step 3)

Complex method for recognizing revenue

If you used the more complex method of deferring revenue, then step 4 just described gets hairy. Instead of one bucket that was deferred, you had about six that you need to recognize at this point. Honestly, if you decided to use the more complex method, you should probably have an accountant tracking this for you (that's us, we're good at this stuff). An in-depth discussion of how to do this is beyond the scope of this article, but a qualified accountant would be able to see what we're trying to accomplish and move it forward for you. The entry to recognize everything would look like this:

Accounting for COGS and inventory

In addition, with either method, you will also need to relieve inventory and account for COGS when you ship product:

After a certain period, if backers haven't responded with a shipping address, creators no longer have an obligation to send their reward. Your financial and legal requirements are technically met, and you can recognize the rest of your “unearned revenue”, or “crowdfunding liability”, as “revenue”.