When Is It Time for Revenue Recognition Automation?
Consistency in accounting. Accurate analytics. Enhanced forecasting. Manageable fair value determination. These aren’t just the calming bedtime mantra for certified accountants. It’s what happens when companies invest in automating their finance function, in particular revenue recognition.
Here we dig into the 4 primary benefits of revenue recognition automation so you can see where a lack of automation may be putting your business at risk and holding it back.
#1 Finance Automation Leads to Competitive Advantage and Growth
The finance swivel (that move that way too many finance professionals make as they swivel from one spreadsheet to the next to gather disparate data) is inefficient and error-prone. Just think what could happen at your organization if your finance team didn’t have to waste time and energy on manual work.
Research from The Hackett Group credited the effective use of technology within finance organizations as a contributor to how world-class companies outperform their peers. The global advisory group’s findings estimated a typical firm with $10 billion in revenue could save up to $51 million by realigning finance talent, restructuring the service delivery model and retooling through technology, thereby freeing resources for higher value activity and innovation.
This same report noted two other hallmarks of world-class finance organizations: an error rate in customer billings 48 percent lower than typical companies and the ability to deliver forecasts 30 percent faster and with more accuracy. Smarter and faster resource allocation decisions are being driven by a high degree of confidence in forecast quality.
As Jim O’Connor, Global Finance and GBS Advisory Practice Leader for the Hackett Group noted: “Finance organizations have been working on reducing costs for some time, something that is sure to continue. But, there’s clearly a renewed focus on finding innovative ways to redeploy savings to support enterprise growth.”
Takeaway: If your current systems (or lack thereof!) are holding back business innovation, you need a revenue automation system that helps you adapt your revenue recognition processes for growth, from onboarding new subsidiary revenue streams to digital transformation and/or IPO.
#2 Manual Finance Processes Are a Roadblock to High Performance
As the digital economy continues to grow, we’ve seen an explosion of customer-centric business models and changes to how companies track, calculate, and report on revenue. Changing accounting rules like ASC606 and IFRS15 are only exacerbating the complexity around revenue recognition — and it’s only going to get more complex and harder to manage, Finance teams relying on manual efforts just won’t be able to keep up.
As is, finance professionals across all functions spend too much time on manual efforts. For example, according to a recent Finance Effectiveness Benchmark from PwC, even amongst the top quartile of companies, analysts were spending 40% of their time gathering the data, as opposed to analyzing it.
Or take for example a SaaS B2B company (and Zuora customer) whose complex bundles and contract modifications, prior to revenue automation, required 10+ personnel to work a five-day operational close. Or how about a certain Fortune 500 hardware/software company whose new service offerings required 60 revenue accountants to keep track of contract changes and revenue modifications (pre-Zuora).
This same report by PwC showed that finance leaders are improving business results by, amongst other things, “spending less time on transactional work.” By eliminating inefficiency, “across many key finance processes, automation and process improvement can reduce costs by 35-46%.”
Just think what finance organizations could do to drive direct value to the business if they weren’t so busy with manual processing…
Takeaway: If use cases are growing and complexity is compounding, and you’re realizing that increasing headcount is just a bandaid, then it’s time for a revenue recognition automation solution.
#3. Revenue Automation Mitigates Compliance Risk.
Manual work doesn’t just lead to inefficiencies and long close times; it can also lead to compliance risk. As revenue volume and complexity increase, the need to ensure revenue recognition is complete, consistent, and accurate becomes more important — and more difficult to ensure.
And don’t kid yourself that you can fly under the radar.
Not to name any names…but it seems like almost every day we see another news report about the SEC charging a company with accounting fraud for misrepresenting its financial condition.
In fact, the agency is policing accounting fraud with a renewed vigor, looking into a broad range of potential accounting issues including how companies book revenue, whether they properly value their assets and obligations, and whether they properly disclose information to investors.
Because, as observed on Marketplace: a dollar is a dollar is a dollar may seem like a truism, but it isn’t always the case when you’re dealing with corporate accounting.
And when it comes to revenue recognition for services, things get even more complicated, because, unlike with products, you can’t just sell the item and mark it down in your books as revenue. With the sale of services, you can’t record that revenue until you’ve actually provided the service. This is complicated.
While it’s true that companies sometimes bend or break the rules to make their revenue look better, incorrect reporting can also happen unwittingly — sometimes as the result of manual error.
Case in point, this oldie but goodie revenue recognition cautionary tale about from RedEnvelope Inc. (now part of Personal Gifts)? Some years back, Valentines Day precipitated shares to tumble more than 25%. The sell-off followed drastically reduced fourth-quarter projections credited not only to weak heart-themed sales, but to a single number misrecorded in the cell of a spreadsheet.
That number threw off the cost forecast, resulting in an overestimation of gross margins which — according to experts reporting on the blunder — likely caused the ouster of the CFO, demonstrated a material weakness in financial reporting controls, and spurred a lengthy review of the company’s accounting practices.
The moral of this story? All it takes is one mistyped number in a spreadsheet to wreak damage on your financial operations, and personal and business reputation.
Takeaway: When you’re done assuming the risk associated with human judgment and error that results from calculating revenue in spreadsheets, revenue automation can give you the confidence that revenue recognition is complete, consistent, and accurate.
#4. Consistent Data Has Countless Beneficial Trickle Down Effects
Think about the trickle down benefits of financial services automation, specifically revenue recognition, from the perspective of those on the outside looking in (read: investors).
Consistency in accounting is paramount. But how can you be sure you’re consistently applying your defined revenue recognition rules on all similar transactions handled over and over? When dealing with high volumes, inconsistency can creep in, but a defined and confirmed routine process eliminates that.
Once in the system, the presence of consistent data backed with confidence allows for more detailed analytics and forecasting than could come out of a messy combination of spreadsheets and human intervention.
Consistency in accounting also trickles down into the concept of fair value determination, which becomes a far more manageable task to identify when there’s a good amount of historical data running through a revenue automation process.
Knowing a company’s annual contract value helps gauge the level of interest in an investment opportunity. It’s about understanding the revenue stream by knowing that value at the beginning, middle, and end of an agreement.
Consistency through automated processes leads to faster closing cycles, substantially reduced audit fees, and tighter internal controls. Simply put, systematic treatment of data reduces the risk of restatements and the accompanying loss of millions of dollars, not to mention the positive impact it has on investor confidence.
Takeaway: When you’re tired of questioning your data and long and painful closes that tie up your team for days on end, it’s definitely time for revenue automation.
It’s Time to Automate Your Revenue Process!
So, as you have probably seen by now, the question isn’t whether to automate your revenue process, but how.Look for a platform that is configurable for your particular business models and revenue rules, can take input from any source data, and is built to handle complex concepts like contract modifications and standalone selling price (SSP).
And the amount of automation is key. According to Jagan Reddy, SVP Zuora RevPro, revenue automation software must achieve 80% or higher automation, “if not, the revenue numbers will trickle down to spreadsheets with no return on investment for your automation software.”
The ROI for sufficient revenue automation is clear: reduce manual effort and close times, minimize compliance and audit risk, and enable business growth strategies.
In light of these clear advantages, is it any wonder that automation of financial operations continues to gain steam, not only as protection but as a key to unlocking corporate excellence and growth?