For companies that sell physical goods, recognizing revenue on sales is very easy and straightforward. Depending on the shipping terms, once the product is shipped or received by the customer, the revenue and costs for those goods are recognized.
However, if your business sells software, services or other intellectual property, then the rules, as well as the accounting for revenue recognition, can be a nightmare. There are a myriad of revenue recognition standards that must be applied over the period of the contract or agreement. Most importantly, many companies are not aware that these rules are expected to undergo substantial changes over the next few years.
Revenue recognition is a significant problem for Software as a Service companies (SaaS). They process hundreds or thousands of orders every month. Each element of their contract, including subscriptions, support and professional services must be accounted for and tracked separately. Many times, these orders can span three to five years.
Faced with these challenges, how do the majority of firms we speak with handle their revenue recognition? Spreadsheets.
Ventana Research has identified four key risks in using spreadsheets to track revenue recognition:
- Spreadsheets are error-prone, do not easily enable oversight and controls and by themselves do not offer an audit trail to track changes.
- Keeping track of all of the elements of every contract and their attributes (such as dates, status, billing and payments) isn’t easy in a spreadsheet.
- When details of the contracts change, as they often do, it’s difficult to ensure that the spreadsheet is up-to-date and accurate.
- A revenue recognition spreadsheet effectively becomes the system of record, but such a system must tie back to the company’s ERP or financial management systems. Keeping the spreadsheets and the financial system of record synchronized can consume a considerable amount of time.
You can download the complete Ventana Research report by clicking here.
In this video below from Sage Intacct, three finance professionals share how Sage Intacct has significantly streamlined their billing and revenue recognition functions, eliminating manual processes and spreadsheets, allowing them to focus on driving growth.