If your company gets all of its revenue at the same time that it puts products in the hands of customers, then revenue recognition is as simple as can be. But what happens when this occurs over months or years? Or if you may be bundling hardware, software, and services across a mix of implementation dates; adding discounts or giveaways that change your pricing, or invoicing now and receiving payment later based upon product or service delivery or implementation? There are plenty of variables that can complicate the process of revenue recognition and, for some companies, changes that can occur on the journey from realizable revenue to earned revenue.
It’s for those companies that NetSuite’s Advanced Revenue Management (ARM) module was developed. NetSuite ARM tools help organizations remain in compliance with generally accepted accounting principles and international regulations by ensuring that organizations don’t over-recognize revenue. This module helps many companies efficiently operate in accordance with the five key criteria for revenue recognition laid out by standards including ASC 606. Those criteria are:
- Identify the contract. Payment terms and conditions are identified, agreed upon, and entered into your NetSuite ERP system.
- Identify the performance obligations. Deliverables and conditions are identified in detail so that all parties understand at what point the customer receives the full value of the contract. As we’ll explain below, these obligations have the potential to become extremely complex, particularly for subscription-based businesses.
- Determine the transaction price. This includes a fixed price and any terms around how that payment will be delivered.
- Allocate the transaction price to performance obligations. NetSuite can automatically decouple the transaction price from any discounts, service bundles, or other conditions that may complicate revenue recognition. For a software company, for example, this might mean separating the price of software from hardware and installation services, all of which might have been invoiced solely as software, provided with free parts and services. Left all together, this could potentially overstate the value of the company’s revenue earned from software alone.
- Recognize revenue in accordance with performance obligations. Revenue is recognized either at a set point in time when goods or services are delivered or over time, in accordance with the obligations laid out in the contract.
What to do when your contract changes
NetSuite’s ARM module automates and simplifies the collectability and measurability criteria required for revenue recognition steps 3 through 5 noted above. However, steps 1 and 2 have the potential to become much more complicated for subscription-based businesses with some of the complications mentioned above. That’s because subscriptions can change the terms of the contract and alter performance obligations in the midst of an existing contract term.
Say your sales team upsells a year-long subscription that, halfway through the year, moves from a Silver Tier to a higher-priced Gold Tier. While NetSuite can adapt revenue recognition to meet the higher price structure, many companies find they must manually merge the original contract line (and related revenue) with the new contract line (and related revenue) that reflects the price change as the same contract or performance obligation. If the change comes between billing cycles, there may be a prorated amount due and due back to account for as well that must be accounted for.
This is where it becomes valuable to have an advanced subscription billing system as part of your NetSuite ERP solution. A subscription billing solution like 360 Subscription Billing’s ARM plugin can automate steps 1 and 2 for you, and will definitely give you more options to control and manage these steps before steps 3, 4, and 5 occur.. In this case, 360 Subscription Billing can account for the price change while linking the new/replacing revenue back through the same contract to the replaced performance obligation. By automating this process, organizations reduce the risk of errors and inaccuracy in NetSuite when it comes time for revenue recognition and reporting.
More subscriptions, more challenges
An automated billing integration can save any subscription-based company time and money – but solutions like these really prove their worth when a subscription carries tens, hundreds, or even thousands of contract conditions.
For example, if a telematics company sells its fleet monitoring solution to a local company, a single contract could potentially set terms for the delivery of 1,000 pieces of hardware, 1,000 subscriptions for monitoring, and the related 1,000 services for installing these monitoring systems on each vehicle within the customer’s fleet. If this hardware is installed across the fleet over the period of several months, then there are multiple contract start dates for which to account. As the order is fulfilled, actual revenue plans can be set and revenue forecasts offset. This is a lot of math and updates, being just one of many examples where an advanced subscription billing and revenue recognition system can rapidly prove invaluable as your company scales.
Is Advanced Revenue Management in NetSuite right for you?
Every company will have to determine for itself whether an investment in a too like ARM can provide needed efficiency for revenue recognition processes. To determine if this solution might be right for your organization, consider:
- The complexity of your subscription-based offerings. Do you have multi-element revenue offerings (such as subscriptions, hardware, services, or other factors) that can complicate performance obligations?
- Your performance obligation complexity. Do you have certain challenges that might prevent you from beginning revenue recognition based on the date when your product or service offering was sold? If an action must take place to trigger revenue recognition – such as shipment or installation – then you are increasing the complexity of your billing.
- Your projected growth. Based on your sales growth forecasts, do you see rapid growth impacting your company in the next 1 to 2 years? Implementing an ARM system before this situation becomes overwhelming can prevent the cost of sorting out problems reactively.
Enhance your automation
As companies grow, manual revenue recognition processes can slow the process of turning revenue forecasts and deferred revenue into accurate income statements. This can weigh down a company’s performance value, while potentially leading to errors and higher accounting costs over time.
It’s challenges like this that drive many companies to consider NetSuite ERP in the first place. But if you’re going to automate your financial reporting in the first place, why only do it halfway? If you’re ready to get more out of your advanced revenue management tool in NetSuite, consider the 360 Subscription Billing ARM plugin.
Have questions? Contact us today.