Revenue Reconciliation

What is Revenue Reconciliation?

Revenue reconciliation is an accounting process where businesses compare revenue records of two or more separate systems to verify they match. By reconciling revenue, accounting teams can spot errors, such as typos or mistakes in data entry, that would otherwise cause problems.

Revenue records typically come from a business’s accounting system, point-of-sale system, and any other external sources (such as credit card statements). All of these sources need to agree with each other. Otherwise, the organization cannot accurately reflect its financial health, disclose revenue on financial statements, or file reports with the IRS.

For revenue reconciliation to work, businesses need to have an effective, software-driven process. They need the data structure to track revenue, checks and balances between different systems, and an automation platform that considers currency exchange rates, payment terms, and the type of services rendered (e.g., contract vs. subscription).

Synonyms

• Cash-to-revenue reconciliation
• Deferred revenue reconciliation

Importance of Revenue Reconciliation

Revenue reconciliation is important because it gives companies an accurate picture of where they are financially, how far they’ve come, and where they’re going. It also helps them spot discrepancies and potential problems early. And it saves them mountains of legal and financial trouble in the event of an audit.

Financial Data Accuracy

Perhaps the most glaring benefit of revenue reconciliation is its ability to improve the accuracy of financial data. Especially for the 59% of businesses that still use spreadsheets as their primary budgeting and financial forecasting tools, there’s a lot of room for error.

Even when billing, ERP, and accounting systems are integrated, there’s always at least some manual guidance required. Plus, computers make mistakes too (albeit, considerably less often).

In any case, it’s always better to double-check the numbers to ensure they match. A seemingly small error like an extra zero could easily throw off the entire financial statement and misguide decision-making. Imagine if $1,000,000 in revenue was reported as $10,000,000 or vice versa.

Identify Fraud

Revenue reconciliation can help companies spot fraudulent activity by flagging discrepancies between two or more reports. If, for example, a customer sent an invalid check for a service, the organization could deposit it on a mobile device and see the balance go up immediately.

On the accounting side, this would trigger the system to recognize new revenue on the books. when the check bounces, certain accounts might not update correctly. Reconciling revenue accounts would show a clear discrepancy between the figure on the income statement ($X for services rendered) and the number in the bank account ($0).

It’s a good idea to set up alarms that flag discrepancies between accounts and reconcile them at least on a monthly basis. This way, companies can be sure their revenue information is accurate and safe from fraud.

Accurate Reporting

Accurate top-line financials are important for several reasons.

• They help management make strategic decisions based on real financial data.
• Investors and shareholders rely on these figures to assess the health and performance of a business. Accuracy builds trust and confidence.
• They’re a legal requirement (businesses need to accurately report their income to the IRS).
• Businesses use them to identify areas where they are overspending and make necessary adjustments.
• They improve accuracy when forecasting future revenue and planning budgets.
• They underscore potential risks and financial threats, allowing for proactive risk management.
• They facilitate comparison against industry benchmarks and competition, aiding in competitive analysis.
• Companies have higher chances of securing loans and funding by providing lenders/investors with a clear picture of the company’s financial health.

Revenue reconciliation verifies that all systems match. In addition to being a responsible thing to do, it ensures they present an accurate balance sheet and cash flow statement to the IRS and stakeholders.

Address Cash Flow Issues

If anything does come up during revenue reconciliation, businesses can investigate it before it becomes a full-blown crisis. Miniscule issues like a missed invoice can compound, causing tremendous revenue leakage if they start to snowball.

GAAP Compliance

Generally Accepted Accounting Principles (GAAP) require companies to accurately report their revenue and expenses. Reconciling accounts ensures that every journal entry makes sense with overall financial records, saving companies from the massive costs of GAAP noncompliance.

Revenue Recognition vs. Revenue Reconciliation

Revenue recognition is a function of accrual-basis accounting where organizations record revenue as it is earned, regardless of whether or not cash has been received. According to ASC 606 (or IFRS 15 for international companies), it requires businesses to recognize revenue when a transaction following conditions:

• The transaction has commercial substance.
• The customer is legally obligated to pay.
• Delivery of goods/services has taken place.
• The company can reasonably assure payment.

Revenue reconciliation is the process a business would use to verify revenue recognition took place accurately. The accounting department would compare service delivery records, billing/payment history, and financial records to ensure they recognized revenue in the right period.

Revenue Reconciliation Challenges for SaaS Businesses

Managing subscription revenue (a SaaS company’s primary source of income) is a lot harder than one-off sales. It requires a deep understanding of different billing cycles, customer payment terms, currency exchange rates, and tax implications for each region they serve.

Organizations need to separate services from product sales (which is difficult when customers buy multiple products at once or receive both subscription and one-time products/services). They also have to track non-revenue transactions such as refunds and discounts.

Common pitfalls include:

• Misunderstanding the contractual fine print
• Incorrect segmentation based on their chosen price tier
• Overlooking usage-based revenue streams
• Incorrectly accounting for discounts, refunds, and downgrades
• Forgetting revenue from partner channels
• Double-counting transactions
• Accidentally glossing over transactions completely
• Mismatching currency exchange rates between bookkeepers and auditors
• Not reconciling deferred revenue at the order level
• Neglecting a formal monthly reconciliation process

To ensure accurate revenue reconciliation, SaaS companies need to have a robust system in place that centralizes revenue data from every source and compares it to the general ledger on a regular basis. They should also consider automating their billing and invoicing processes or partnering with an experienced revenue recognition expert.

How to Perform Revenue Reconciliation

Companies need to reconcile their revenue in two ways: by auditing their revenue recognition procedures and by reconciling their customer accounts.

Revenue Recognition

1. Identify sources of revenue. Start by identifying all the sources from which the company earns revenue. This could include product sales, services rendered, or any other income-generating activities.
2. Match revenue with expenses. In accordance with revenue recognition principles, ensure revenue recognized matches the expenses incurred to earn that revenue in the same accounting period.
3. Document revenue transactions. Maintain detailed records of all revenue transactions. This includes invoices, sales receipts, and contracts.
4. Calculate revenue. Add up all the revenue from various sources for the accounting period. Only include the revenue that meets the recognition criteria.
5. Reconcile revenue accounts. Compare the calculated revenue with the revenue reported in the financial statements. Identify any discrepancies.
6. Investigate discrepancies. This could involve checking transaction records and contracts or speaking with relevant departments.
7. Make necessary adjustments. After identifying the reasons for the discrepancies, make the necessary adjustments to the financial statements.
8. Review and approve. Have a senior accountant or financial manager review and approve the adjusted financial statements.
9. Report revenue. Finally, report the reconciled revenue in the financial statements.

Account Reconciliation

1. Gather information. Start by gathering all relevant financial records. This includes bank statements, invoices, receipts, and your company’s general ledger.
2. Identify the accounts to reconcile. Decide which accounts need to be reconciled. Typically, this involves all the asset, liability, and equity accounts.
3. Review the general ledger. Examine the general ledger for the account you’re reconciling. The ledger should contain a record of all transactions affecting that account.
4. Compare the ledger with external statements. This could be a bank statement, a statement of account receivables, or
5. Identify discrepancies. Note any discrepancies between the two sets of records. This could include differences in amounts, transactions that appear in one record but not the other, or inaccurately recorded transactions.
6. Investigate issues. Depending on the comparison results, you may need to contact other departments or customers for more information.
7. Adjust the general ledger. Based on your investigation, make the necessary adjustments to the general ledger. This could involve correcting errors or adding missing transactions.
8. Verify the adjusted balance. After making adjustments, the account balance in the general ledger should now match the balance on the external statement.
9. Document the reconciliation. Create a record of the reconciliation process. This should include the original and adjusted balances, a description of each discrepancy and how it was resolved, and the final reconciled balance.
10. Review and approve. Have the reconciliation reviewed and approved by a responsible individual, such as a senior accountant or financial manager.

How a Billing Platform Ensures Efficient Revenue Reconciliation

Integrated billing software gives companies a timestamped, detailed record of every transaction. And it automatically reflects customer payments in financial records, eliminating manual data entry. It also provides detailed analytics and reporting capabilities to make it easy to review revenue transactions.

Billing platforms also have triggers that notify teams when they detect unusual activity or potential discrepancies. This helps companies keep on top of revenue and expenditures throughout the month, ensuring timely and accurate revenue reconciliation. Plus, the automated system reduces (and sometimes eliminates) the risk of human error.

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