REVENUE RECOGNITION AND FORECASTING SOFTWARE
WHAT IS REVENUE RECOGNITION?
Revenue recognition is the process of understanding when your business has earned its revenue.
Companies that use a cash basis of accounting will earn revenue when the cash hits the cash register or bank account. However if your organization uses accrual based accounting then you will recognize revenue only when you have earned it. Generally Accepted Accounting Principles (GAAP) provides a consistent and detailed method to follow for recognizing revenue and for reporting purposes. In the USA GAAP are rules that need to be followed but for companies that operate outside of the US, they will be following IFRS (International Financial Reporting Standards).
The International Financial Reporting Standards are a set of principles with the most recent standard, IFRS 15.
According to the IFRS 15 standard, there are 5 steps to follow :
Identify the contract(s) with a customer.
Identify the performance obligations in the contract. Performance obligations are promises in a contract to transfer to a customer goods or services that are distinct.
Determine the transaction price.
Allocate the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract.
Recognise revenue when a performance obligation is satisfied by transferring a promised good or service to a customer. A performance obligation may be satisfied at a point in time or over time. For a performance obligation satisfied over time, you would select an appropriate measure of progress to determine how much revenue should be recognized as the performance obligation is satisfied.
For both SaaS and professional services companies, investors will look for your financial statements to adhere to GAAP or IFRS because they want you to recognize revenue in a standardized way.
WHY IS REVENUE RECOGNITION IMPORTANT TO THE CFO?
Foremostly revenue recognition is a regulatory requirement of GAAP/IFRS and therefore it is vital to get this correct to ensure compliance. Getting this wrong can have different implications based on whether you’re viewing these as an internal or external stakeholder.
Revenue/deferred revenue reporting is often one of the most important performance metrics monitored by the senior management of a business. It tells them not only your current earnings but also expected earnings for the remaining period. Being able to forecast future revenue recognition correctly is critical for business planning. It enables management to ensure that the necessary resources required to deliver the revenue are in place. This all helps CFO/Finance Teams understand the company's current and predicted cash position, which is vital for financial planning.
Incorrect revenue recognition can be viewed as fraudulent reporting and this can have negative effects on a company’s brand.
Potential investors that are interested in acquiring a stake of your business will often use your company revenues for valuation purposes. For investors that already own a stake in your business revenue is incredibly important to understand the growth that the business has gone through under their investment. Specifically in the technology industry we often see investors looking for companies that have shown strong revenue growth with potential for this to grow further.
For technology investors the importance of revenue growth can outweigh that of profits. Early stage investors will be looking to see that their investments have the ability to rapidly scale, creating demand from the next stage of investors and bigger returns.
Revenue on its own cannot necessarily tell you the health of a business. As mentioned above different stakeholders are looking for different things. Revenue however is an important metric in many of the key financial ratios that people use to monitor a business’s financial health.
For publicly listed companies profits and earnings per share all directly affect a companies share price. A significant misstatement of revenues will reduce profit and earnings per share and is likely to reduce your company valuation.
FINANCIAL IMPLICATIONS OF DELAYED IMPLEMENTATIONS
A software company ran an analysis on the delays that they were seeing in their professional services engagements. They sell an enterprise software product with a typical ARR of $50,000 and PS fees also of typically $45,000 - $50,000. Their analysis was looking to articulate why it was urgent to address their delivery issues for their internal PMO and this data was put together by their finance team.
CASH FLOW IMPACT
1 month delay on a 3 month $50k implementation will mean $16.6k of delayed cash collection per delayed project.
1 month delay to a new client launch would mean $4.2k of lost revenue based on a $50k fee. With 50 new clients this could mean $208k of lost revenue.
1 month delay to a 3 month implementation would lead to a 25% reduction in utilization for each fully utilized team member that can not be reallocated to other work over the course of the project.
Good margin on SaaS PS is 40%. One months idle time caused by delays in implementation would be $10k of staff cost (for staff that can not be reallocated) for a 3 month $50k implementation.
CAC of $0.65 per new $1 of revenue, means a CAC Payback period would be 12 months for each $50k new subscription contract. High performing SaaS companies are able to achieve CAC Payback of circa 6 months.
Another example of failed implementations impacting financial performance is from a publicly traded US telecommunications company that had a business unit which was generating $100M in new business bookings but had significant problems with delivery caused by the post sales delivery being delayed. These problems meant they were only able to recognize $40M during their financial year which the stock market analysts saw in their financial statements, wrote about and their share price dropped as a result.
In one example, they had won a $3.6M ARR deal which was a great new logo for their organization. This deal was worth $300,000 per month in recognized revenue once they got their customer to go live on the telephony platform that they had purchased. Unfortunately the implementation was delayed by 6 months which meant they were only able to recognize $900,000 of the $3.6M contract in year 1.
REVENUE RECOGNITION IN PRECURSIVE
Precursive PSX helps companies to forecast and recognize revenue aligned to their business model. Revenue can be forecast and booked at a project level for fixed price, T&M and milestone based work. Precursive will automatically calculate revenue forecasts so you can see where you are at any given time. Finance teams can reduce the admin burden for period-end with a view of both recognized and deferred revenues.
Revenue Forecasting and Revenue Recognition
Precursive revenue forecasting and recognition software is designed to help companies quickly forecast and recognize revenues as projects progress. Precursive PSA provides revenue modules to:
Customize revenue recognition tracking to your business needs
Recognize revenue based on project tasks, timesheets or milestone completion
Import or export revenue transactions into your financial system
Forecast and recognize revenue on both fixed price and T&M projects
PrecursivePSA enables you to report on all revenues across products, practices and geographies. Get a real-time view of:
Forecasted and actual revenues by account
Forecast vs. actual revenues by account, project or phase of work
Forecast vs. actual revenues by resource or team
Share revenue reporting with other members of staff
Brandon Marsee, SVP Finance - Polsource
The key triggers for us were: What does our revenue look like and do we have the staff to support that?