High on the list of things most CFOs and small business owners would prefer to think about another day? The accounting close process. That’s because on a scale of 1-10, the pain of the process clocks in at about a 9, right up there with root canals.
And despite the advances made in other aspects of business, research shows that companies are taking longer to close today than they did five years ago.
One reason for these figures could be the rise of recurring revenue-based companies, which have an even tougher time than traditional product-based business models due to the complexity of their pricing models, higher transaction volume, and the correlative time that adds to the process.
Cobbling together spreadsheets and keeping revenue schedules updated with changing subscriptions stresses even the most savvy finance teams, particularly those working solely within traditional ERP systems.
But without a comprehensive subscription subledger to complement your primary general ledger, you could face something even worse than an ugly close: having to say no to a customer because your accounting process can’t accommodate the way they want to buy.
What is a subscription sub-ledger? It’s a system that, in tandem with a primary ledger (SAP, Netsuite, Oracle):
For years, finance departments and business execs have tried to figure out ways to ease typical pain points and make the accounting close process easier for all. In fact, a survey found that for 75% of senior finance people from across the globe, the close process is one of their top two areas they want to improve. However, old habits die hard, and quarter after quarter, companies find themselves doing the same process the same way just to get through the deadlines and hope one day a better system gets built.
But as we’ve seen, subscription companies have a lot more reason to figure out a better way. In order to understand the health of your business and take swift action to help the company maximize value, you need to accurately and quickly report on your organization’s financial results. Let’s say you are a $30M company with IPO aspirations; since a strong level of trust in your revenue line is a crucial component of the company’s eventual valuation, you must be able to reflect accurate and meaningful results. The same is true for smaller growing firms that plan to raise another funding round.
The good news is that with knowledge of the typical pain points and the right subscription subledger to address them, more companies can speed up their process, turn back that pain dial, and concentrate on the more fulfilling parts of their business.
For us, it is the ability to charge for a product or service on a minute-by-minute basis and only charge our customers for what they're actually subscribed for or using. With a subscription subledger, when we have to scale back, the system automatically adjusts. That has been a huge, and that's ultimately the promise of the cloud. Bruce McFadden, COO, Firehost
There are three major challenges for recurring revenue-based companies:
1. Market-Driven Pricing Strategies
In the subscription economy, your customers are consuming services in different amounts at different times of the year based on their needs, which means the market drives how you price and package your service more than ever before.
But this flux can wreak havoc on your accounting system and drive your finance team nuts.
2. Subscription Lifecycle Commerce
If you’re running a subscription business, you know it’s no longer a “one and done” deal any more. Your business is dependent upon the full lifecycle of your product or service: initial sign up, add ons, upsells, new product intros, mid-term cancellations, and so on.
The problem is, traditional ERP systems and processes haven’t quite caught up with the demand for a more evolutionary approach.
3. Customer-Centric Billing Demands
With traditional businesses, you have pretty tight control of what you charge your customers and when. But to build the types of long-term relationships you need to succeed in the subscription economy, you have to shift your thinking and focus on making the customer happy. That means offering credits for a future billing period or rewarding loyalty with a discount.
These types of adhoc charges and credits give your accounting and finance team headaches at the end of every accounting period.
We’ll get into process improvements you can make below, but first let’s look at some of the ways subscription subledgers are helping accounting close.
Here are four specific pain points you might hear from your finance team leads and how a subscription subledger can help you address the shortcomings of your traditional accounting methods.
1. Pain in the revenue recognition process
“We’re doing all our revenue recognition in spreadsheets. This isn’t scalable and we can’t grow our business this way. if a customer upgrades or downgrades a subscription, revenue recognition needs to quickly reflect that change – and that’s very hard when you’re managing rev rec in spreadsheets.”
Solution: Subscription subledger revenue recognition management gives you the ability to:
2. Pain in the audit process
“I have to pull data from 9 spreadsheets to reconcile our data for auditors.”
Solution: Subscription subledgers can spread amounts over multiple time periods, instead of ledgers that restrict you to simple debits and credits. They also have intelligent algorithms that know how to differentiate between the treatment of one-time and recurring amounts, instead of lumping them together.
3. Pain in the forecasting process: “I have no visibility into future revenue. It takes me hours to get a cash forecast for budgeting and planning.”
Solution: Subscription subledgers can calculate key subscription metrics like ARR and churn, and a powerful rules engine can adapt to subscription changes as they happen and re-calculate any revenues impacted by those changes.
4. Pain in general ledger summarization process:
“My general ledger doesn’t understand subscriptions. I can’t feed it un-billed deferred revenue.”
Solution: Subscription sub-ledger summary journal entries allow you to automatically generate debit and credit journal entries for billings, cash and revenue, and align journal entries with your chart of accounts. They can connect with your general ledger in one of two ways: Summary level or Transaction level. Which you choose depends on your business needs.
In addition to new technologies, there are five other things companies can do starting today that can help them transform their accounting close process. Of course like anything else in life, there is no silver bullet that will ensure accounting nirvana. But by combining these ideas with the implementation of a subscription subledger, you could be well on your way to a much happier (and profitable) place.
1. Perform a systems review
Your close process system design and execution are crucial to your success, and it’s rare that a single process issue is lengthening your company’s close. One of the best ways to pinpoint problem areas is to do a systems review.
At the end of a review, you’ll at least have a basic understanding of the multiple things in play in your close process. And don’t just file the review doc in a folder in the storage room. This should be something you refer to on a regular basis to track your process improvement and look for other areas to work on.
2. Analyze business process flow
Analyzing your business process flow shows you what manual steps you’re taking in your closing process and gives you insight into which data feeds could be synchronized or automated. For example, it may make sense to feed invoice information directly into both the CRM system and the accounting system.
3. Evaluate your close schedule
By looking at your close schedule, you’ll be able to track the activities being done, by whom and when. This can give you valuable information about tweaks you can make to become more nimble.
4. Evaluate and manage the team
A optimized financial close is the result of great teamwork. If you empower other staff to get involved in improving the close process, there will be more ownership in the outcome. At the very least, you should be meeting with your team every quarter to do a post-mortem about your close to look at what worked, what didn’t and discuss areas of improvement.
All of this assumes you’ve got the right team in place, of course. What if you suspect that’s not the case? An assessment of the skills of those currently working on the close is in order. Are they up for the job of improving your close process? If not, do you want to train them, hire a consultant or add new team members? How does your team respond to change? All of these things will help you develop a plan to improve that will have a better chance of sticking.
5. Never underestimate the power of a checklist
When you’re knee-deep in your hundredth close, a checklist may seem like the last thing you have time for. But industries the world over, including hospitals dealing with life and death issues, use checklists for good reason: they ensure that the right person does the right step at the right time.
As a subscription company, you know pretty much nothing is business as usual. And of course the accounting close process is no different.
So it’s even more important for you to take on the challenge of improvement through a combination of a comprehensive subscription sub-ledger solution and process tweaks or overhauls so you can reap the benefits: less stressed staff, lower compliance costs, increased teamwork, and more time to make your customers happy.