How to get Revenue Recognition right in 2023

In today’s macro-environment, companies have a huge challenge ahead of themselves - ensuring sustainable growth of their business. Growth at all costs is a trend of the past, and companies must now optimize the right metrics to make the most of the downturn.

Finance teams have a big role to play in this growth path, as the scorekeepers of their company’s growth they are responsible for keeping everyone across the company - from the leadership team to the business teams - aligned on the financial planning and forecasting which then guides the decision making for all downstream functions.

However, one challenge that finance teams often face is - “What is the right way to keep score for their company?” How do you measure revenue optimally? For B2B SaaS enterprises, revenue recognition is the ideal way for achieving this. In this article, we discuss how your company can do revenue recognition in 2023 to drive its growth through the downturn and beyond.

Revenue recognition is the process of recognizing revenue when it is realized and earned, rather than when cash is collected. Correctly recognizing and deferring revenue enables you to have the most accurate insights into your business profitability, financial health, and performance. It is typically implemented on top of subscription-based pricing models.

When done right, revenue recognition helps to improve a company's cash flow by providing an accurate picture of the revenue that the company is likely to collect in the future. This is useful for planning and forecasting purposes, as it empowers the company to make informed decisions about how to allocate its resources and manage its operations.

Revenue recognition is also a core principle of Generally Accepted Accounting Principles (GAAP). GAAP is important for finance teams as it provides a framework for reporting financial information, ensuring consistency and accuracy - it is highly regarded as the metrics standard for companies across the finance industry.

Thus, by following revenue recognition best practices, companies improve the transparency and reliability of their financial statements. This is beneficial for a variety of stakeholders, such as investors, creditors, and regulators, who rely on a company's financial statements to make decisions and assess its financial health.

Challenges

There are several challenges that organizations can face when calculating revenue and MRR on spreadsheet software such as Microsoft Excel or Google Sheets.

• Large amounts of data: it can be difficult to manage and analyze all of the data required for Revenue Recognition on platforms like spreadsheets. This can make it difficult to accurately calculate revenue and MRR, and can also make it difficult to identify trends and patterns in the data
• Time-consuming and labor-intensive: High-growth businesses that have a high volume of transactions have to manage added complexities like changes, refunds, disputes, and prorations in their transactions. This makes the process of revenue recognition more difficult and time-consuming
• Changing business context: High-growth companies have to deal with constantly changing business scenarios, which impact how their revenue is measured, consequently, finance teams also have to constantly ensure that their calculations are accurate and reflect the current state of their business

How to Get Revenue Recognition Right in 2023

Enterprise finance teams usually rely on ERP software like NetSuite or Microsoft Dynamics for helping them solve all of their finance use cases. However, for fast-moving B2B enterprise SaaS companies, this may not be the best solution.

ERP solutions for enterprise finance teams are expensive and difficult to implement, and they may not always provide the desired level of customization. They are also difficult to maintain and upgrade and do not keep up with the changing needs of the business.

Moreover, ERP solutions create a silo within the organization - which limits the cross-functional collaboration between finance and product, sales, or marketing. Examples of collaboration include:

• Analysis of ROI across marketing and sales functions based on standard GAAP metrics which gives an objective view of how the business is growing
• Analyzing product usage to derive insights about customer behavior and trends to inform pricing and product decisions for the future

We believe that instead of ERP software or Excel spreadsheets - both of which create silos within the organization - finance use cases like revenue recognition should be executed on top of all companies’ existing system of record: the data warehouse. This is where the entire company’s data, across all business functions, is maintained and is the right place to enrich business workflows across the company with revenue recognition data.

• Reduce your costs by keeping your data in your own warehouse - giving you more transparency about the data you store and use
• Collaborate better with teams such as product and growth across the company, by providing them a better view of their financial targets and budgets through data
• Use insights (like product usage, and sales performance) from other teams to guide pricing decisions and growth forecasts for the company

We believe that the ideal way to solve revenue recognition, along with different finance use cases, is in the form of workflows directly on top of the company’s data warehouse: where it enriches the single source of truth of the company, instead of creating data silos.

Houseware today offers a robust revenue recognition workflow that you can use in a simple plug-and-play manner. Skip the months-long onboarding cycle, simply give Houseware access to the data you need in your warehouse, and get value out of the box!