3 Roadblocks Preventing Accurate Revenue Recognition

B2B pricing has steadily become more complex due to customer demands for more customization.

Tiered pricing, subscription billing, and usage-based pricing models are a few consequences of this trend. Unfortunately, greater uncertainty in revenue recognition is perhaps the most serious consequence for B2B companies seeking to maintain compliant records.

ASC 606, the Financial Accounting Standards Board (FASB) standard on revenue recognition, works well with one-time billing and sales. However, recurring billing poses several challenges for which an outdated revenue recognition process cannot account.

Here are a few roadblocks that companies relying on recurring billing often encounter – and how to overcome these challenges.

Siloed Data

Modern companies aim to simplify customer payments and diversify their billing channels to make things as convenient for customers as possible. For instance, a company might collect payments from an app, a digital wallet platform, a custom processor, or a one-time bank transfer, depending on the contract terms and pricing plan customers choose. 

While customers benefit from the convenience, RevOps teams end up with revenue data spread across different platforms. Add to this the complexity account and subscription software management bring, and reconciling these different data sources can be a severely time-consuming endeavour.

What’s worse, this data sprawl causes errors in revenue recognition. RevOps might neglect a data source or receive incorrect data due to inconsistent formatting. The best way to solve this problem is to ditch problematic data collection mechanisms like manually collated spreadsheets and rely on a unified data source that automatically pulls revenue information.

Data lakes or warehouses should be the standard on which RevOps teams rely when conducting revenue analysis. Centralizing data simplifies analytics workflows and leads to better revenue projections. While ditching spreadsheets is tough given how embedded they are in every finance function, moving to an electronic platform that automates data sourcing is a no-brainer.

The benefits of moving to such a platform outnumber the negatives of letting spreadsheets go. For example, RevOps teams will have to spend time training on the electronic platform but can create ad hoc reports and projections to offer deeper revenue insights to CFOs.

Manual Contract Management

SaaS and other companies relying on recurring billing often run into issues recognizing contract changes and their implications on revenue. ASC 606 stipulates that companies must recognize a contract’s status (whether new or modified), calculate revenue appropriately, and then recognize it.

In the case of a subscription contract, customers can change terms throughout the cycle. For instance, a customer might upgrade a subscription or cancel their plan. In such instances, companies cannot treat the modified revenue stream as a new contract. Instead, finance teams must recognize changes and apply the new revenue stream to their books.

Add to this picture even more complexity around pricing tiers and the number of pricing combinations customers can create in hybrid price models, and RevOps teams have almost no chance of keeping pace with changes manually.

Automation is the obvious solution to this problem. Data centralization plays an important role here too. Companies can monitor changes and apply them to their unified data source immediately. This prevents any need to manually review contracts or conduct audits before reporting deadlines.

More importantly, automation prevents errors in revenue recognition, something that can have serious consequences for companies. Public companies will experience significant negative regulatory impact, while private companies will struggle to raise additional funding if they constantly restate revenues.

Legacy Billing Systems

Recording prices and costs are a significant part of following ASC 606. All companies must calculate the Standalone Selling Price (SSP) of their product. The SSP is not the sale price. Typically, the sale price includes the cost of additional services and products.

The SSP is the cost of the product itself, once all other service and product SSPs are stripped away. Manually calculating the SSP is simple when companies follow a one-time billing model. However, recurring revenue models are a different beast.

For instance, if a customer downgrades their subscription, companies must recalculate the SSP at the lower tier and also account for changes in complementary SSPs. A SaaS company in this scenario will have to prorate changes to support team sizes and apply them to every billing period for as long as the contract is active.

Typically, companies calculate SSP with the Cost of Contract, a key component of COGS, and subsequent gross margin calculations. With complex pricing models, manually calculating these numbers is impossible.

Companies using legacy billing systems also find themselves behind the curve. Older systems do a great job of recording changes and customer activity – but they don’t go a step further and simplify ASC 606 reporting needs. Adopting modern systems that automate SSP calculation and cost of contract is the best way for companies to avoid misreporting revenue.

For instance, an automated system can instantly recognize event-based revenue triggered by consumption changes or licenses used. This workflow simplifies finance tasks, leading to lean and efficient team structures.

Overcoming Revenue Recognition Challenges

Electronification is critical to overcoming revenue recognition challenges. While small companies can get away with measuring changes in recurring revenue on spreadsheets, growing companies need electronic assistance. Automation will solve several revenue recognition challenges while helping companies cater to customer needs in a tailored manner.

Comments are closed.