Recurring revenue models come with a variety of attractive benefits. However, before you implement a recurring revenue strategy, it’s important to understand how doing so could add significant complexity to your accounting system.
Here are some of the challenges that lie ahead:
Billing Complexity – There are a variety of billing options in a recurring stream, including fixed-rate, tiered pricing, or volume-based. Promotions or trial offers add more facets, as billing must reflect start and end dates. Tracking this data manually is tough, and legacy billing systems aren’t designed to handle this complexity.
Billing Frequency – Unlike a traditional sales model with a fixed number of invoices and a consistent billing cycle, a recurring revenue model bills customers repeatedly, as often as once per month. The accounting team generates more invoices, more often. Managing this workload becomes harder as the number of subscribers increases.
Forecast Accuracy – Although recurring revenue models provide stability and consistent cash flow, they confuse forecasting. Multiple pricing plans, free trials, and promotional discounts must be considered. You need to know what existing customers are paying and whether they’re taking advantage of a promotion. You also need to understand when promotional rates expire and the probability of converting those customers to a full-priced plan.
Income Tax – Moving to a recurring revenue model has tax implications. Companies must recognize revenue in a specific way to comply with generally accepted accounting principles (GAAP). The Internal Revenue Service (IRS), however, has its own set of rules that don’t always line up with those of GAAP. Often the amount of pre-tax income reported on GAAP-based financial statements isn’t the same as what would be reported using IRS tax rules. Understanding IRS and GAAP requirements and how they each impact taxes is critical.
Revenue Recognition – Recurring revenue recognition can make accounting challenging and cumbersome for businesses that traditionally sell products rather than services. In the product-sales model, revenue is recorded once an order has been delivered. From an accounting standpoint, most recurring revenue streams are considered services, which changes how revenue is recognized and requires carefully tracking accruals or deferrals. Trying to manually enter revenue into the accounting system in spreadsheets is not only labor-intensive but also increases the risk of data entry errors.
Sales Tax – Until now, few states have collected sales tax on subscriptions. However, this is changing as companies in more industries transition to subscription-based models. Rules vary among states on what is taxed, as do tax rates. Tracking these details and ensuring that you apply the right rate is difficult.
Overcoming the Challenges
There are ways to handle the obstacles that recurring revenue creates for your accounting department. Here are some crucial steps to overcoming the challenges of revenue recognition:
Automate the billing process – Recurring revenue increases the complexity and volume of billing processes. Start by automating subscription and billing management. Doing so simplifies the billing process by putting subscription and billing data in one place, which will improve data quality and ensure accurate billing. Keep in mind that subscription plans that combine flat monthly rates with variable charges or one-time fees can create billing issues that will negatively impact your customers’ experience. Make sure your solution supports multiple pricing options, including fixed and consumption-based rates, with the ability to customize plans.
Improve Key Performance Indicator (KPI) tracking – Monthly recurring revenue is an important KPI, but understanding the ratio of revenue from net-new customers and upgrades versus revenue lost due to cancelations or downgrades improves forecasting. Tracking changes in monthly churn rates, average customer tenure, customer acquisition costs, and average revenue per account all can help predict future performance.
Simplify revenue recognition – ASC 606 offers uniform guidance for reporting revenue, which helps simplify financial statements and provides comparability across industries. Make sure your accounting software has rules set up to implement this guidance.
Evaluate GAAP and IRS rules – The easiest way to evaluate how different accounting options affect finances is by generating both a GAAP and an IRS statement. Both rulesets should be applied to each transaction for the greatest accuracy. The ideal accounting system will do this automatically, as reentering transactions manually increases the risk of errors, not to mention consuming time.
Managing Recurring Revenue With Dasston’s DCAA-On-Demand SuiteApp for Oracle NetSuite
Daston helps ensure customers’ success in adding a recurring revenue stream with its SuiteApp product for Oracle NetSuite. By automating labor-intensive billing processes, Daston eliminates many of the repetitive tasks accounting staff dread. Because recurring revenue involves complex rating scenarios, Daston supports transaction, usage-based, subscription, and hybrid pricing models.
When recurring revenue is involved, revenue recognition also can be complicated. Revenue from a contract might be recognized all at once, over several months, or stretched out for years depending on how customer agreements are structured. Since developing a separate revenue recognition schedule for every customer isn’t scalable, Daston’s DCAA-On-Demand SuiteApp creates revenue rules for each product or service you offer and then links them to individual line items in a contract. Revenue is automatically recognized based on the assigned schedule for each item. This improves compliance by consistently applying revenue rules.
Daston’s solutions also simplify tax calculations. You can evaluate different accounting models by creating a separate book for each set of standards you want to apply. These transactions automatically post to the appropriate books simultaneously, so your accounting personnel don’t have to enter data multiple times or make manual adjustments. The SuiteTax sales tax solution helps you meet complex tax collection and reporting requirements by automating sales tax calculation. It also improves accuracy by keeping sales tax rates current and using ZIP+4 codes to ensure the correct rate is applied to every transaction.
Ready to move to recurring revenue? Learn how Daston’s DCAA-On-Demand SuiteAPP can handle the accounting challenges that may come. Schedule a consultation by clicking HERE today.