As the ways in which we do business change and evolve, the tools we use for SaaS revenue recognition should, ideally, change as well. Unfortunately, that’s not always the case.
A recent study found that just 40% of CFOs felt confident about their system’s ability to provide relevant insights, and half reported that their systems did not adapt well to change. If your revenue recognition system is stuck in the days of spreadsheets, it’s probably time to rethink your approach before you end up with a rev rec wreck.
SPREADSHEETS COULD BE TANKING YOUR SAAS REVENUE RECOGNITION
Spreadsheets aren’t all bad; in fact, they’re a cheap way to get rolling and work just fine at very small scale. But, they’re labor intensive, unscalable, subject to inaccuracies and untimely in surfacing management data.
Before there were savvy tools developed to deal with the complexities of subscription rev rec, spreadsheets were basically the only option. Holy sheet that was painful (sorry). Billing bookkeepers booked contracts and manually divvied them out across earned revenue period columns (by month) and then booked those totals back to the accounting system each period.
That’s fine when you have ten customers, but when you have a thousand, errors are pretty frequent and very costly. In fact, studies show that 35% of companies report having found errors in their most important spreadsheets. There’s definitely a better, less painful, way.
SUBSCRIPTION REVENUE BILLING SYSTEMS ARE BETTER, BUT STILL NOT GREAT
The next wave of revenue management came from dedicated billing tools that sat outside of the financial accounting package, but billed, tracked and applied earned revenue. These tools are good in that they’re purpose-built for the task of billing and applying rev rec templates.
However, these systems are also challenging because they live outside of financial management and are likely to introduce latency into the management-critical accounts receivable, earned revenue and deferred revenue balances (often monthly updates) that is so important for SaaS companies. On top of that, the relationship between systems is a complex one that requires an integration that can be fragile or even volatile.
And as William Schonbrun, general manager of billing for NetSuite, says on the Oracle blog, billing systems often simply can’t keep up with the pace of a “hyper competitive, customer driven world.”
“Standalone billing systems inherently can’t handle this change – they’re simply too far from the action…They’re too far from where the customer is acquired, contract terms established, products and services selected and delivered.”
Billing systems are nice in that they bolt on top of existing financial accounting systems. They are less laborious than spreadsheets, much more scalable and less likely to have inaccuracies as they are single entry. But, the relationships to the rest of the organization can be fragile and the timeliness of management data is often delayed.
INTEGRATED SUBSCRIPTION REVENUE FINANCIAL ACCOUNTING SYSTEMS ARE YOUR BEST BET
The most mature and accurate method of subscription revenue recognition is fully integrated modern financial accounting packages. These end-to-end tools get granular with daily recognition, accurately pulled back into financial statements and timely management dashboards.
These enterprise-level tools also accommodate common rev rec complexities like: first month free, discounts and services attached. This is a CEO’s look at rev rec, not an accountant’s look, but it’s important to have your CPAs involved in your subscription revenue recognition template design if you want to be GAAP compliant and/or auditable for valuation. Your quality of revenue will take a hit if these ducks aren’t lined up.
YOU CAN’T AFFORD TO GET SUBSCRIPTION REVENUE RECOGNITION WRONG
And, finally, the bad news: While integrated financial accounting systems including complex billing and SaaS revenue recognition are by far the most accurate, scalable and timely solutions, they are costly, take time to implement and most significantly, they introduce the extreme switching cost of financial accounting migration.
Finding and integrating the right revenue recognition system can be complex, and often frustrating, but it’s not something an SaaS can afford to get wrong. Investing in accurate, integrated solutions is a must for avoid a revenue recognition wreck.
This article originally written by Emily Alford appeared on SaaSX.