Recurring revenue companies face challenges when recognizing revenue (RevRec). But just as there are multiple interlocking challenges to SaaS revenue recognition, there are multiple approaches and tools to solve those challenges. Which approach a company takes often depends on its lifecycle stage or size, the complexity of its RevRec challenges, and the resources at its disposal.

This article will cover three of the most common solutions. First, of course, is spreadsheets — the backbone workhorse of every Finance department, and a practical and flexible tool that works for a variety of operations. Second is the ERP approach, whereby companies that already rely on proven software such as NetSuite or Sage Intacct to manage their finances and accounting use these ERPs to manage their RevRec. 

Finally, there is a new generation of revenue recognition tools emerging, such as RightRev, which can dramatically simplify and automate the entire RevRec process, freeing up time for Finance teams while improving accuracy and efficiency. 

In the end, there is no one right way to tackle the challenges of RevRec; our aim is to guide you down the best-fit path for your business.

The introduction of ASC606 in 2016 (for public companies) and in 2019 (for private companies) represented a shift in the way revenue is recorded in financial records, with the aim of standardizing revenue recognition practices. Since then, RevRec has become a critical, guiding metric for financial reporting. However, SaaS RevRec best practices are often complicated to implement. And they’re frequently in conflict with other management objectives, such as tracking growth in ARR.

“RevRec best practices are often complicated to implement.” 

Imagine you’ve sold a three-year subscription contract with a defined 10% price increase each year. If you’re in startup mode or scaling up your company, the yearly revenue expansion is highly desirable. Being able to demonstrate rising ARR each year (for example $10k in year 1 growing to $12.1k in year 3) is something that you and prospective future investors will celebrate.

However, from a RevRec perspective, unless there are unusual termination provisions, you would be obligated under ASC606 to recognize this three-year contract with escalating annual payments evenly over the three years as a single “performance obligation.” Each year your recognized revenue would be the average: $11.03k. From the RevRec ASC606 perspective, this contract would not show growth.

Here, the challenges of Finance and Revenue teams have multiplied: For GAAP accounting and taxes they need to track RevRec correctly; They also need to manage cash and project actual invoices and collections versus expenses, which will be different from the RevRec numbers. Thirdly, they’ll still want to be able to show growing ARR via escalating customer contracts.

So, what do they do? That depends on the tools at hand. Some approaches will require more manual work and involve more complexity. Some of the newer revenue recognition tools (including Nue) were purpose-built to be able to tackle all of these challenges simultaneously.

But no matter which platform you use, there are always ways to simplify and improve your RevRec processes.

A small company with a fairly straightforward revenue stream might find revenue recognition intimidating, despite the fact that their needs are often the easiest to tackle. If your company doesn’t engage in multi-year contracts or a complex blend of subscriptions, physical goods, and consulting, revenue recognition can be managed effectively through spreadsheets.

“A small company with a fairly straightforward revenue stream might find revenue recognition intimidating, despite the fact that their needs are often the easiest to tackle.”

Leveraging revenue data from quoting and billing applications, smaller businesses can effectively track revenue recognition on a monthly basis using a spreadsheet type called revenue waterfalls. This kind of RevRec tool works particularly well when the company has a relatively small number of contracts and low levels of variability in those contracts.

Spreadsheets work well at this stage because smaller companies generally only need accurate recognition numbers for end-of-year tax purposes. Any small discrepancies in RevRec during the course of the year can be sorted out at year-end and corrected with minimal headaches. Inputting data for RevRec purposes can be batched and periodically processed, so long as someone has eyes on your numbers frequently enough to ensure basic accuracy.

Common Methodologies Within Spreadsheets

A common method for inputting numbers into spreadsheets at this stage is the half-month method: Contracts starting on or before the first half of that month, and with an end date after the end of the month, are recognized as contributing revenue for that full month.

This method saves your team from having to exactly prorate and calculate daily amounts when a contract starts mid-month. This simplification is an industry-accepted approach for smaller companies because it tends to produce reliable results, especially if your contracts tend to be similar. Even an unusually large contract could distort the revenue for, at most, half a month (i.e., 1/24th of a year).

“The half-month method's simplification is an industry-accepted approach for smaller companies.”

If such a company already uses integrated quoting and billing software like Nue, this process becomes particularly easy. Nue provides instant visibility into Monthly Recurring Revenue (MRR) by product, accurately and in real-time, making it a perfect partner to power RevRec spreadsheets.

However, the spreadsheet method can become unmanageable quickly if a company is pursuing a land and expand strategy with lots of contract changes, or entering into multi-year or more complicated bundles of software and services. In that case, it’s best to turn to a more systematic and automated way to achieve RevRec.

As companies grow and their revenue streams become more complex, maintaining revenue recognition through spreadsheets becomes a burden. Eventually, as they scale and grow in complexity, businesses look to integrated revenue recognition tools to help streamline their processes.

The oldest and most tested options are revenue recognition systems built into accounting platforms and ERPs. These tools have a track record going back twenty years. They are built around a wide variety of use cases and can do an excellent job in expert hands. NetSuite and Sage Intacct offer both basic and advanced revenue recognition tools. These tools work well for many companies — including larger public and private technology companies — but the workflow required to manage them can be complex.

“The revenue recognition systems built into accounting platforms and ERPs are the oldest and most tested options.” 

Another important factor is that ERP-based solutions to RevRec tend to be inflexible; if you have a land and expand approach, a rapidly changing business model, or include consumption/usage as a material part of your revenue, your ERP will be hard-pressed to catch up to your ever-evolving business practices. ERPs require a high level of expertise to set up and use correctly, and have some historical limitations that render them less than ideal for rapidly growing companies.

So When Are ERP-Based Solutions the Right Choice?

If you’ve already implemented this type of system, or if your accounting team is intimately familiar with one of these platforms, it would be prudent not to let all that training go to waste.
 
Moreover, ERP solutions are particularly optimized for businesses that deal primarily with physical goods or professional services revenue. NetSuite has a full workflow specifically for physical goods fulfillment, and strong tools for tracking and recognizing professional service billings. This combination of capabilities can be the winning solution if your business focuses here.
 

However, relying on your ERP to manage subscription revenues and RevRec may not be the most convenient or flexible option. If your business is adding a subscription services model on top of your core functions of delivering physical goods, or if you are in fact squarely focused on subscription services—then you might consider an easy-to-use and implement SaaS revenue recognition tool. One that works well with your existing ERP. Nue, for example, can support your existing ERP approach while still delivering accurate RevRec and critical management reporting.

“Relying on your ERP to manage subscription revenues and RevRec may not be the most convenient or flexible option." 

Recently, a third path has emerged: integrated portable revenue recognition. For example, the tight, seamless integration between Nue and RightRev allows for your numbers to flow from your Sales team all the way through to billing and revenue recognition.

RightRev is a next-generation version of SaaS revenue recognition; heavily API-based to support a wide range of integrations but also tightly integrated with CPQ and billing applications such as Nue.

Nue’s tight integration with RightRev enables our customers to implement revenue recognition quickly and easily at early stages, while they are still running QuickBooks. It also supports NetSuite or Intacct customers who are not convinced that the heavy lift and inflexibility that accompanies a RevRec implementation in their ERP is worth it. 

“Nue’s tight integration with RightRev enables our customers to implement revenue recognition quickly and easily at early stages, while they are still running Quickbooks.” 

RightRev boasts the ease of use and attention to user experience that has become a gold standard for applications, on top of a highly scalable backend. In addition, RightRev and Nue’s systems are so tightly integrated that most of the revenue recognition setup occurs within Nue. This way, revenue and contracts can be viewed or reported on in both Nue and RightRev. This ensures that the Finance and Revenue teams are always, automatically, on the same page.

The integrated solution route can also be far easier to set up. Instead of having two separate implementations, companies can complete this entire process in one streamlined project. This enables companies to get away from spreadsheets quicker and easier, and implement a solution that will continue to work for them as their business grows.

No matter the size and complexity of your overall business model, selecting the appropriate approach for tackling RevRec takes thoughtful consideration. It’s prudent to evaluate your needs based on the performance of your current business and re-evaluate them periodically.

With choices based on the above considerations, companies can ensure accurate financial statements to the necessary level of granularity, and make informed decisions that both drive growth and streamline processes.

At the end of the day, a variety of solutions will probably be employed as your business needs change. While traditional solutions can work well for many businesses for a period of time, most eventually realize that long-term success means harnessing the ability to cost-effectively scale, but also staying nimble enough to take advantage of a changing competitive landscape.

Emerging technologies are indeed allowing such businesses to choose cost-effective, powerful, yet easy-to-implement solutions that bring together disparate data in real-time. Using them, management can clearly understand their business and make impactful decisions that allow them to win in the competitive marketplace. Regardless of the RevRec approach that is right for your business, Nue can support it and make it easier to implement and maintain.