To stay compliant with accounting standards and regulations (and to have a clear view of their revenue streams), businesses need to recognize revenue correctly, accurately, and on time.
Since this process is cumbersome and error-prone, it is one of the many processes that company stakeholders look to automate as part of their modern digital transformation.
What is Revenue Recognition Automation?
Revenue recognition is the process of identifying and recording revenue-generating transactions (i.e., sales and services) in accordance with business accounting and tax laws. It is a critical part of the financial close process, as it helps companies report accurate financial statements to investors and other stakeholders.
Revenue recognition automation is a technology-driven approach that automates manual and inefficient processes related to revenue recognition. It streamlines the process by offering automated data capture, revenue recognition rules-based monitoring, real-time visibility of customer contracts, and automated revenue calculations.
By automating revenue recognition processes through the use of technology, companies can reduce errors and mitigate compliance risks associated with manual entries. The end result is improved accuracy, transparency, and visibility of their revenue streams.
- Automated Revenue Recognition – The process of automating the revenue recognition process using specialized software.
- Accounting Automation – The use of technology to automate manual and inefficient accounting processes.
- Revenue Process Automation – The elimination of manual processes related to revenue processes, including sales contracts, invoicing, and revenue recognition.
Why Businesses Need to Automate Revenue Recognition
Revenue recognition can be confusing even at the smallest scale but is especially difficult for companies with multiple revenue streams, changing customer payment terms, and other complexities.
With automation, businesses can reduce manual errors, gain real-time visibility into their contracts and accounts receivable (AR), and ensure compliance with accounting standards.
Revenue Compliance Complexities
The tax gap is the IRS’s estimated difference between taxes owed and taxes actually collected. It comprises both intentional and unintentional errors, such as misclassifying expenses, not filing on time, or not recognizing revenue correctly.
Companies are required to report and recognize their revenue in accordance with Generally Accepted Accounting Principles (GAAP), which can be complex and require significant manual effort—so complex that the gross tax gap equates to hundreds of billions of dollars every year.
Unfortunately, non-compliance with the regulations can lead to significant fines and penalties. Automating the revenue recognition process can help companies get a better handle on their finances, so there are fewer compliance violations.
Diverse Revenue Models (for example, subscription business model)
Especially in the Software-as-a-Service (SaaS) space, companies often operate on multiple revenue models and have complex customer payment terms that vary depending on usage or volume.
Many companies, for example, use the subscription business model, where customers pay monthly or annually based on the type of services they use. This model makes it difficult to accurately recognize revenue since payments often span multiple accounting periods, and companies must ensure they are counting each customer’s usage accurately.
With automated revenue recognition software, businesses can easily track customer usage and apply the appropriate GAAP standards when recognizing revenue.
Inefficiencies and Costs of Manual Processes
When revenue management is completely manual, several problems arise for the business:
- It can take weeks or even months to identify and fix errors, making it difficult for finance teams to be agile and responsive.
- Manual processes create additional costs, as businesses must incur the costs associated with hiring staff to manage these functions.
- There is a lack of real-time visibility into accounts receivable and customer contracts.
- Future revenue forecasting is inaccurate due to the lack of insight into future customer payments.
Automated revenue recognition software eliminates these costs by reducing time spent on manual entries, helping finance and accounting teams become more agile and efficient.
Benefits of Automated Revenue Recognition
As with any business process, automating revenue recognition has numerous advantages, namely legal compliance, reporting accuracy, elimination of manual errors, valuable insights, and the ability to scale.
ASC 606 Compliance
ASC 606 is a revenue recognition standard that requires organizations to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to receive in exchange for those goods or services. The standard, which was issued by the Financial Accounting Standards Board (FASB) in 2014, applies to all contracts with customers, regardless of industry.
Automating revenue recognition helps companies comply with ASC 606 by providing visibility into customer contracts and accounts receivable, ensuring that the correct accounting principles are applied when recognizing revenue.
Improve Revenue Reporting Accuracy
Reporting accuracy isn’t just crucial for compliance and legal reasons—it can affect a company’s ability to communicate company health and success to investors and potential customers. Inaccurate reporting leads to:
- Unclear financial statements
- Company’s stock prices or valuations being affected by inaccurate revenue forecasts
- Inaccurate understanding of customer lifetime value (LTV)
- Weakened investor relations due to a lack of trust in the company’s financial health
Automated revenue recognition software helps with reporting accuracy by ensuring that all information is accurate and up-to-date. It also provides real-time visibility into accounts receivable, future customer payments, and any changes in customer contracts or usage.
Automate Revenue Recognition Tasks
Revenue recognition is one of the many tasks accounting departments must take on. But in today’s digital landscape, 75% of accounting activities can be automated.
There are several residual benefits to automating accounting:
- Reduced manual labor costs (the largest cost for any business)
- Increased accuracy and reliability of data
- Better visibility into customer contracts and accounts receivable
- Improved forecasting capabilities
- Ability to scale as the company grows
Moreover, businesses that don’t automate their processes will eventually face the consequences of manual errors and inefficiencies, and they’ll do so against competitors that already have. The result is lost customers and lost revenue.
82% of businesses fail due to poor cash flow management, according to a study conducted by Jessie Hagen of U.S. Bank. Revenue intelligence is valuable because it helps businesses and stakeholders understand their customers, revenue streams, and financial health.
By using revenue recognition automation software to track customer contracts and accounts receivable, businesses can get insights into customer buying habits, churn rates, and future revenue forecasting.
These insights can be used for decision-making purposes such as pricing products or services, understanding customer lifetime value (LTV), and predicting customer churn.
As businesses grow and evolve, their revenue streams diversify and their customer bases expand.
The sheer volume of transactions associated with this growth can cause a tremendous burden on the accounting department, as they need to track and record this additional data.
One of the main benefits of revenue recognition automation is that it allows businesses to easily scale their operations by automating the most labor-intensive accounting activities such as invoice generation, revenue contracts management, and accounts receivable tracking.
Revenue Recognition Automation Best Practices
Before automating any process, a well-defined process must be in place. To ensure a successful transition to automated revenue recognition, companies should follow these best practices:
1. Develop an understanding of the customer’s purchase agreement and contractual obligations
A purchase agreement is a legally binding contract that outlines the terms of a sale between a buyer and seller. It defines the rights, responsibilities, and expectations of both parties for the duration of the transaction.
Purchase agreements outline essential information, including:
- Payment details
- Delivery date
- Product or service description and quantity
- Warranties or guarantees offered by either party
- Conditions for returns or refunds
And for companies with simple, scalable pricing models, understanding the customer’s contractual obligations ahead of time can help to ensure accurate revenue recognition.
2. Set up a system to track all customer contracts, accounts receivable, and any changes in usage or terms
To track revenue contracts, businesses need to set up a system that captures all the necessary customer data and usage information. This includes billing dates, product information, contract terms, payment methods, discounts offered, and any changes in customer usage or terms.
In most cases, contract management software can automate many of these activities, saving companies both time and money.
3. Get visibility into future payments from customers, including due dates and payment methods
One of the biggest challenges for revenue operations is forecasting, but it’s also one of the most important. Businesses need to have visibility into future customer payments so they can accurately recognize revenue and invoice accordingly.
To make this easier, businesses should do one or more of the following:
- Create an automated billing system that creates and sends invoices based on customer contract terms.
- Invoice customers in advance of when their payment is due, so they are more likely to make payments on time.
- Offer multiple payment methods to provide more options to customers.
- Switch to a predictable revenue model (e.g., subscription-based) that eliminates the need for manual invoicing and billing and prioritizes recurring revenue.
4. Automate data entry and ensure accuracy of information with software that can sync with existing systems (ERP/CRM)
Data entry is the most error-prone element of the entire revenue recognition process. Automating the data entry and information tracking process with software specifically designed for revenue recognition can help to ensure accuracy of data and streamline the entire process.
Software that is compatible with existing ERP/CRM systems is especially helpful, as it allows businesses to easily sync their customer data and accounts receivable information across multiple business systems.
5. Create a system for tracking usage and changes in terms by customers
To ensure accurate revenue recognition, businesses must keep track of any changes to customer contracts or usage that could affect revenue recognition.
This includes pricing alterations, discounts offered, or upgrades in the customer’s service plan.
By creating a system to track any changes in customer terms, businesses can make sure they properly recognize revenue and avoid under or over-invoicing their customers.
6. Regularly review processes and procedures to ensure they comply with the latest accounting standards
The accounting standards governing revenue recognition are constantly changing, and businesses must ensure they follow the latest regulations.
As such, companies should regularly review their processes and procedures to ensure they comply with the newest standards.
Even if an organization has its own accounting department, having a third-party professional review its practices can help avoid potential compliance issues.
7. Don’t fall into the trap of thinking ERP systems are enough
ERP systems are excellent for managing financial processes, including revenue recognition. But companies should not assume that ERP systems are enough to ensure accurate revenue recognition and compliance with accounting standards.
The main limitation of ERP systems is that they don’t provide the detailed customer data and usage information needed for accurate revenue recognition without costly customizations.
Furthermore, ERP systems may not be able to track changes in customer terms or pricing, making them less suitable for revenue recognition automation.
To ensure accuracy, businesses need software specifically designed for revenue recognition.
Revenue Recognition Automation Implementation
When a business decides to invest in a revenue management solution, it is important to set up the right processes and procedures to ensure successful implementation.
Here are some key considerations:
Revenue Recognition Software
The right revenue recognition software for a business will help it remain compliant, protect it from risks, streamline its internal processes, and scale.
ASC 606/IFRS-15 Compliant
The two most widely accepted accounting standards for revenue recognition are ASC 606 (U.S. GAAP) and IFRS-15 (International Financial Reporting Standards).
Software that is compliant with these standards is essential.
Protects Business from Risks
Revenue recognition software should help keep businesses safe from risks, particularly fraud and non-compliance.
Streamlines Revenue Accounting Processes
In addition to compliant revenue recognition, adding an automated tool to a company’s tech stack should drive operational efficiencies and reduce manual labor.
Scale Finance Operations
Revenue recognition processes aren’t static—they evolve and change. The right software should be able to scale with businesses as their operations grow.
CPQ (Configure, Price, Quote)
CPQ software is instrumental in driving order accuracy, as it helps businesses create accurate quotes with the right terms and pricing. By accurately determining the contract price at the time of the transaction, it helps businesses avoid costly mistakes such as:
- Under-invoicing their customers for services or products
- Over-stating their revenue based on incorrect assumptions
- Failing to recognize revenue at the right time because they haven’t tracked changes in customer terms
People Also Ask
What is automation in revenue management?
In revenue management, automation refers to the use of software to automate processes related to revenue recognition, such as tracking customer usage, applying GAAP standards when recognizing revenue, and forecasting future revenues. Tools used include revenue recognition software, CPQ (configure-price-quote), and ERP systems.
Are the revenue recognition methods industry specific?
The main revenue recognition methods businesses use include the sales-basis, completed-contract, and percentage-of-completion methods. The choice of method will depend on the nature of the business and its industry, but all companies must comply with the applicable standards (e.g., ASC 606).
What are the 3 main conditions that require you to recognize revenues?
The three main conditions that require you to recognize revenue are the satisfaction of performance obligation, collectability, and transfer of control. Depending on the method used to recognize revenue, the interpretation of these criteria may vary slightly.