Mastering the Complexity of Revenue Management. An Intacct White Paper

Transcription

1 Mastering the Complexity of Revenue Management An Intacct White Paper

2 Table of Contents Executive Summary The Complexities of the Revenue Management Imperative Specific Challenges for Finance Evolving Industry-Specific Requirements Increase the Complexity A Better Approach: It Starts with a Better Process The Technology for Revenue Management: Key Criteria for Decision Makers OpSource Streamlines Revenue Management with Intacct Optimized Revenue Management: The Benefits Intacct for Revenue Management About Intacct

3 Executive Summary The complexity of business today continues to increase. Customers are demanding more value for their investments. Regulatory frameworks are becoming both broader and more stringent, placing greater compliance demands on companies of all sizes and across all industries. As a result, corporate financial professionals are dealing with contracts that are dramatically more complicated, as they wade through a rapidly evolving maze of nuances, rules and requirements. All of this makes it even harder for the finance team to get the visibility it needs to properly recognize its revenue. In addition, executives want to get a better sense of the business by seeing real-time results from this quarter and accurate forecasts of revenue for upcoming quarters. To date, finance has struggled with time-consuming, error-prone spreadsheets to handle increasingly complicated and critical revenue recognition tasks. But those outdated methods are no longer sufficient to handle the greater complexity of contemporary revenue recognition challenges. In the following paper, Intacct examines the current revenue recognition situation and pinpoints how new-breed technology can help streamline this process. It also discusses the key features and functionality that evaluators should consider when choosing software solutions to automate revenue management. The Complexities of the Revenue Management Imperative In industries like software and services, revenue management is one of the most challenging issues for financial executives. The thicket of loosely defined regulations, evolving interpretations and stiff penalties for non-compliance create levels of complexity and variability that outstrip the ability of controllers, CFOs and finance VPs to stay on top of revenue management. The challenges revolve around three key concerns: Regulatory Compliance Thanks to guidance like (SOP) 97-2, 98-9 and 81-1; SAB 101 and 104; and EITF 0021, 00-3 and 03-5, revenue managers feel like they re trying to hit a moving target blindfolded. These regulations are challenging to interpret, understand and apply consistently particularly since many companies execute so many non-standard agreements with their customers. In fact, the process is so difficult that IDC found that 57 percent of public companies cannot finalize their revenue numbers within their monthly close process. Delays of up to three weeks stem from increasingly complex transactions and a lack of necessary information. The processes that were the most difficult to establish internal controls for? Contract management and revenue recognition 1. 1 Financial Executive Benchmarking Survey Best Practices in Revenue Reporting 3

4 Forecast Visibility For too many companies, revenue forecasting is more art than science. IDC found that two-thirds of companies rely on generalized forecasts based primarily on current sales pipeline and fail to evaluate the impact of deferred revenue and upcoming renewal business 2. This translates into more than just failures of predictability it also represents tremendous lost opportunities in renewals, upsells and cross-sells. Staff Productivity Today, an overwhelming 92 percent of public companies are using simple spreadsheets for critical revenue-accounting tasks 3, which create major issues from an auditing perspective. Fragile and complex single-user spreadsheets require extraordinary manual effort to build and maintain. Almost all sophisticated worksheets contain errors, incorrect calculations and improper allocations. These spreadsheets are a chief cause of monthly-close delays and revenue leakage, as well as slower billings, collections and renewals. What s more, they lack the auditability that s required for such a heavily regulated function. Specific Challenges for Finance The well-intentioned and diligent efforts of financial professionals often come up short in several areas with respect to revenue recognition. One area is defining the revenue recognition foundation. Executives need to play a central role in defining the company s revenue management and revenue recognition policies. Without this involvement, persistent ambiguities can make it more difficult for the financial team to implement consistent and defensible procedures and rules that make revenue recognition manageable. With those policies in place, it s also easier to deploy and use standard contracts. While exceptions and one-offs will always be a factor, standard contracts enable revenue managers to apply rules more consistently and document, track and defend the exceptions granted to specific customers. Similarly, companies also run into trouble in their efforts to align and communicate across sales, services and accounting. In most organizations, these are considered separate functions that are automated by separate computer systems. Information conflicts and gaps are virtually inevitable in such environments. Evolving Industry-Specific Requirements Increase the Complexity Traditionally, software companies have licensed their software for on-premise installation at a customer s location. Maintenance fees typically range from percent and include free upgrades and technical support. For these software companies and other organizations that sell bundled offerings a new regulation called Vendor Specific Objective Evidence is increasingly becoming a concern. 2 Ibid. 3 Financial Executive Benchmarking Survey Risks in Revenue Reporting 4

5 VSOE (or (SOP) 97-2) asks companies to bring greater clarity and accuracy to how they recognize revenue for multi-element agreements agreements where software and services are bundled into a single contract. Instead of rolling complex multi-element agreements into a single top-line figure, VSOE makes vendors distribute the fee based on objective, market-based evidence of the value of each element. If the vendor does not follow VSOE, revenue cannot be recognized until the vendor delivers the entire contract (including services and support), effectively delaying recognition for months or years. Today, vendors and buyers alike are also embracing Software as a Service (SaaS). This is essentially a month-to-month subscription to use software, which the vendor manages in its own data center. While eliminating some of the complexities around VSOE, SaaS creates additional added complexity around recognizing revenue on a recurring basis, often over the estimated lifetime of the customer. In service-based businesses such as professional services, accounting firms, consultancies and other similar organizations revenue management and recognition are often predicated on specific contracts and unique terms. Here, project delivery milestones are the elements tied to recognizing revenue. Revenue recognition processes in these organizations require firms to capture all billable time and expenses, and to track project statuses to tie events back to contract terms. From a tracking perspective, this introduces challenges in terms of time, complexity and cost because few companies have integrated systems to connect time sheets, for instance, with revenuerecognition systems. Once again, spreadsheets emerge as the tool of last resort to track this complex, fast-changing, but business-critical data. A Better Approach: It Starts with a Better Process Faced with these challenging hurdles, companies are looking to automate revenue management processes to achieve better compliance, improve visibility and lower their costs. Somewhat counter-intuitively, improving automation doesn t start with technology. Since revenue management touches virtually every area of the organization, streamlined operations start with thoughtful processes designed from the top down based on input from senior executives across multiple disciplines and functions. Some of the key areas to consider include the following. Define revenue recognition policies that encompass agreement from all stakeholders: finance, sales, product development, support and others. What s a subscription? What falls under the heading of maintenance or support? Will fees be pre-determined or will they be based on the number of users or transactions, or project-based milestones, for example? What discounts will you permit and how will those discounts be allocated? Where appropriate, establish your VSOE criteria using market-tested parameters. Get your auditors involved in these process designs and policy definitions. Their agreement will pay huge dividends during audit time. 5

6 Craft standard contract agreements that use defined contract terms. These contracts must be flexible enough to adapt to your business needs (such as variable pricing models) but standardized enough to prevent revenue management problems down the road. Eliminate side-agreements that only create headaches for long-term revenue management. The Technology for Revenue Management: Key Criteria for Decision Makers Automating the management of revenue accounting can yield tremendous tangible benefits from a variety of perspectives from faster closes to greater accuracy and lower costs. However, there s much more to automating revenue accounting than simply deploying a more robust spreadsheet or more powerful macros. To achieve improvements, decision-makers must deploy technology that supports a lengthy list of requirements. Some of the key criteria include support for the following: Complex contracts and products You need the ability to record and manage all types of contracts and products to capture your complex arrangements with customers. Ideally you want to support multiple product types, such as licensed products, subscriptions, maintenance contracts, support agreements and more. For many companies, these contracts must also support variable pricing models based on metered volumes (e.g. transactions), flat fees, quantity, recurring subscriptions or project milestones often in some combination. Integration with CRM One of the vulnerabilities regarding revenue management lies in the disconnect between sales and finance. The sales rep calls on customers and completes sales, then tosses the agreement over to the finance department, which is responsible for billing, collections, revenue recognition and accounting. Streamlining the quote-to-cash process by integrating your front- and back-office systems, including automation of both recognized and deferred revenue enables your sales team to focus on selling and frees finance up to focus on higher-value activities. Translating Revenue Recognition Rules into Templates and Schedules Every company s revenue recognition rules vary according to their business model, products, markets and other variables. To automate this complex process, revenue managers need the ability to easily codify these rules through the creation of flexible templates and schedules that reflect the nuances and uniqueness of their business. Finance can then easily apply these templates to individual products, services or contract line items. This holds true across software license agreements, SaaS subscriptions, maintenance contracts and professional services, and drives the automated calculation of both recognized and deferred revenue schedules. Automated Revenue Recognition and Deferred Revenue Management The right solution for revenue recognition should be designed to handle the complexities that financial professionals confront every day. Some companies may have thousands of different rules and templates. An automated system that can integrate with the general ledger automates the revenue recognition process. This automation, in turn, can dramatically cut staff workload, reduce errors, eliminate cumbersome and time-consuming transactions and provide a single point of audit and reconciliation. For instance, some systems enable you to project forward revenue for 24 months with a single click just using automated deferred-revenue calculations. 6

7 Greater Visibility into Deferred Revenue Forecasts Leading revenue management systems provide executives with more than streamlined compliance and operations. They provide a solid picture of both current and deferred revenue by showing a real-time picture of future revenues, projected renewals and total deferred revenue stretching months or years into the future. Easily analyze the impact changes to products and pricing have on revenue. This helps you better identify sales gaps, launch the right products and accurately forecast deferred revenue. OpSource Streamlines Revenue Subsequent Modifications Long the bane of finance pros, subsequent modifications are events that affect your deferred revenue schedule mid-stream. For instance a customer has a standard 12-month contract but unexpectedly delays implementation by two months. You can t simply tack on the two months at the end. You must make a subsequent modification that recalculates your revenue schedule to recognize 25 percent of the revenue in month three and 1/12th of the revenue in each of the following nine months. In this way, your new schedule reflects the catch up. This type of transaction is a nightmare to manually enter, calculate and audit in a simple spreadsheet, and is an area where automation can deliver enormous benefits in efficiency and accuracy. Billing One of the subtler advantages of some systems lies in the ability to decouple the billing schedule from the revenue recognition schedule. For instance, a company may choose to bill quarterly for a one-year contract, but recognize the revenue on a monthly basis as the service is delivered. This enables the firm to negotiate payment terms with their customers that are decoupled from revenue recognition requirements. Management with Intacct OpSource helps SaaS and Web companies more effectively develop and deploy software applications. In addition to support for multi-entity and multi-currency management, the firm also wanted to improve its revenue recognition processes. Instead of managing revenue recognition using complicated spreadsheets, OpSource uses Intacct to automate the management of deferred revenue and revenue recognition and optimize contract renewals. Built-in reports help finance quickly and easily see deferred, recognized and renewal revenue for more reliable forecasting. Intacct s advanced contract management functionality allows us to more easily and accurately forecast our revenues, said Keith Adams, Chief Financial Officer. This has freed up time to allow the finance team to analyze the data like we never could before. Improved Sales Management Many revenue-management solutions use reporting tools to forecast upcoming renewals. With this clearer visibility into contracts and expirations, finance can alert sales, and sales reps can proactively cross-sell and up-sell customers with additional products and services in a timely and appropriate fashion. Easier Add-Ons Suppose you sell software to 10 users for one year. But six months later, that customer adds five more users for a year users whose term expires at different times. The right solution lets you adjust and co-terminate so that all users end their current terms at the same time, simplifying the renewal process for you and your customer. 7

8 Optimized Revenue Management: The Benefits Streamlined, centralized and automated revenue management can generate a range of benefits for companies. Better Alignment Between Sales and Finance Sales reps and managers have a better understanding of the true impact and timing of sales on revenue. Finance is no longer hostage to side-deals and one-off agreements that create unnecessary compliance issues and added manual effort. Finance also better supports the renewal and upgrade process by providing better and timely visibility into customer-account status. Automation of Complex Revenue Recognition Processes The complexity remains, but properly designed and implemented systems streamline the processes and shield users from the underlying complexities. Sophisticated calculations are applied correctly and consistently with complete auditability. Accelerated Closings Automated revenue management means an end to the lengthy closing delays caused by the hundreds of mundane calculations and track-backs accountants must perform to ensure that recognized revenue is correct and defensible. Fewer Errors By eliminating the use of spreadsheets, accuracy improves greatly. There are no fragile or mysterious formulas or accidental changes that are virtually impossible to detect or trace back. Reduce Revenue Leakage By automating the process and reducing the number of inaccuracies, you can ensure that all appropriate revenue is captured and recognized. Forecasting Visibility You can immediately see more accurate revenue forecasts that reflect deferred revenue and predicted renewals. This visibility improves your ability to manage sales resources and to optimize future revenue. Stronger Compliance Auditors and regulators are zeroing in on revenue recognition policies and procedures. Given the stakes, companies can no longer afford to rely on manual processes. Automated revenue management creates structured, repeatable, auditable processes that improve your company s compliance posture in this critical area. Intacct for Revenue Management Intacct Contract and Revenue Management automates and optimizes the financial processes associated with complex contractual relationships. Intacct Contract and Revenue Management frees your staff from managing revenue through complicated spreadsheets, which lead to inevitable errors, lost revenue and compliance risks. With Intacct Contract and Revenue Management, you can maximize billing and collections, automate the management of deferred revenue and revenue recognition and optimize contract renewals. Intacct Contract and Revenue Management includes a wide variety of built in reports to help you forecast deferred and recognized revenue and ensure compliance with revenue recognition rules from the SEC, FASB and the Sarbanes Oxley Act. Centralize the management of complex contracts Intacct Contract and Revenue Management eliminates the need for paper documents and maintains detailed electronic 8

9 information about each customer s contracts within a centralized repository. Automate revenue deferral and revenue recognition Intacct Contract and Revenue Management allows you to setup revenue recognition rules for different types of products and services that allow you to post revenue automatically, based on flexible revenue recognition schedules. Gain visibility into deferred and recognized revenue Intacct Contract and Revenue Management allows you to quickly and easily forecast deferred, recognized and renewal revenue so that you have instant access to reliable, accurate business forecasts. Comply with standards and regulations Intacct Contract and Revenue Management aids compliance with AICPA s Statements of Position (SOP) 81-1, 97-2 and 98-9, SEC Staff Accounting Bulletins (SAB) 101 and 104, VSOE, and FASB s Emerging Issues Task Force (EITF) Maximize renewal revenue Intacct Contract and Revenue Management streamlines the contract renewal process and increases renewal revenue by automatically scheduling, managing and providing visibility into contract renewal activities. Automatically notify clients or salespeople in advance of renewal dates, decreasing days sales outstanding (DSO). About Intacct Intacct is a market and technology leader in on-demand financial management and accounting applications and the preferred provider of financial applications for the AICPA and its subsidiary CPA2Biz. Thousands of businesses, from startups to public companies, use Intacct s awardwinning solutions to automate key business processes from order entry through cash collection and from procurement through vendor payment. The Intacct system includes financials and accounting, contract and revenue management, order management, financial consolidation, real-time dashboards and financial reporting applications, all delivered via Software-as-a- Service. Intacct is designed for FASB, Sarbanes-Oxley and GAAP compliance and is the only open on-demand financial management system seamlessly integrated with Salesforce and extended by hundreds of partners. 125 S. Market Street, Suite 600 San Jose, CA Phone: sales@intacct.com The Intacct logo is a trademark of Intacct Corporation in the United States. All other trademarks mentioned in this document are the property of their respective owners Intacct Corporation. All rights reserved. 9