When is dedicated software for revenue recognition a good idea/necessary?
The answer depends on the complexity of revenue recognition within your organization. In general, the more localized and discrete your revenue recognition process is, the less likely that separate software is required. If production and delivery of revenue-based activities are controlled by a single business unit in a single location, traditional revenue recognition will probably continue to do the job.
However, many organizations are quickly moving to subscription-based or on-demand business models where revenue is not necessarily tied to the immediate delivery of a good or service. Companies experiencing the following challenges might find traditional revenue recognition software inadequate for current or proposed business models:
- Moving from a licensing model to a subscription model, because this fundamentally changes revenue recognition from a perpetual purchase to an ongoing business relationship. Businesses often underestimate the transformational nature of this change, which requires a significant ongoing commitment to customers, including better integration between customer service and revenue recognition. Revenue becomes more directly related to service and customer satisfaction.
- Limited ability to align revenue recognition, sales activity and billing operations, especially in models where revenue can be recognized independently of a billing cycle or pricing models can require different revenue recognition from stated deliverables. As an extreme example, consider the telecom industry, where revenue can be recognized immediately at certain usage thresholds, monthly, or over an extended period based on the products and services involved -- and with potential discounts issued on a onetime or ongoing basis. Because of the need for flexibility, telecom requires specialized revenue recognition functions that outpace traditional revenue accounting systems.
- The need to separate revenue recognition on multi-element sales, such as software, support and services, especially when each element has a different valuation or is not generally valued as a standalone element. Since the Financial Accounting Standards Board update in 2010, EITF 08-01 requires companies to recognize each element of an accounting unit separately. For instance, the revenue of a personal computer should be broken up into a hardware component recognized immediately, a software component recognized based on the estimated lifespan of the computer, and potentially, a service component recognized throughout the life of the contract. In the absence of vendor-specific or third-party validated evidence, an estimated selling price must be used to separate these elements. This level of recognition might not be supported through traditional revenue recognition tools and can be time-consuming to calculate by hand.
About the author:
Hyoun Park is a founder and Principal Consultant at DataHive Consulting. He focuses on the intersections of social media, big data and human insight to develop enterprise technology solutions. For the past 20 years, Park has focused on harnessing the transformative power of the web, social media, enterprise mobility and the cloud while responsibly sticking to a budget. Follow him on Twitter @hyounpark.
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