Once your customer has paid for and received the product or service they ordered, the transaction's over, right? Well, almost. There's one last piece of the quote-to-cash process: revenue recognition. This step enables businesses to claim the money they earn to reinvest it in talent, product development, marketing, and other initiatives that continue to grow the business.

Let's look at what businesses need to know about this final, critical step.

Revenue Recognition 101

Revenue recognition is the process businesses (with regulatory guidance) use to determine when they can record revenue in the general ledger. The general principle is that revenue should only be recognized when it has been earned—i.e. when the product or service has been delivered—not just when the payment is collected.

This process is simple enough when you're selling individual products, trading merchandise for money on the spot. The revenue is earned while payment is collected to be recognized immediately. But as business models get more complicated, so does revenue recognition. When customers use subscriptions or usage-based models, paying in advance through stored value, allowance, or any other consumption-based model, that revenue can only be recognized once you have delivered the goods or services they've paid for.

Revenue Recognition Challenges

Consumption-based models are a must-have for businesses that want to keep (and grow) their client lists. But with these models come all kinds of inconsistencies and variations that make ledger management a challenge: start dates, usage rates, and payment plans may all vary from customer to customer, making it impossible to manage revenue recognition manually. As a result, keeping the general ledger up to date becomes a full-time job (or more), and the risk of errors, delays, and compliance issues grows dramatically.

The Consequences of A Messy Ledger

Revenue recognition is regulated in the US by Generally Accepted Accounting Principles (GAAP) and internationally by International Financial Reporting Standards (IFRS). And to make matters more complicated, in 2018, US GAAP began conforming to the IFRS standards for revenue recognition under a set of rules referred to as ASC 606. Still, for a quick overview: ASC 606 is a five-step revenue recognition framework whose core principle is to emphasize that companies must recognize a contract's total transaction price as obligations are fulfilled to the customer, in an amount per obligation proportionate to the relative market value of the goods and services that comprise those obligations.

For businesses struggling to keep manual revenue recognition practices up to date, the biggest takeaway of ASC 606 is that compliance failures could lead to significant financial consequences. As such, many companies have had to reevaluate their billing technology to implement systems that allow for efficient, accurate, and compliant revenue recognition practices on various billing models.

Making Revenue Recognition A Breeze

Businesses with high volumes of transactions or any combination of subscription and/or usage-based models find automating the process with a configurable, rules-based revenue recognition engine essential. We recommend looking for a billing platform with a native sub-ledger that meets the following criteria, for starters:

Capable of applying complex revenue recognition rules specific to your company

Aligned with the latest regulations, including but not limited to ASC 606

Flexible enough to address any changes in business needs or regulatory guidance with a minimal lag time

These capabilities simplify revenue recognition, minimizing the risk of inaccuracies, improving future forecasting, cleaning up audit trails, and reducing the time required to close the books. All in all, a powerful advantage for any company, especially those operating on high-volume, complex business models.

Gotransverse uses a configurable, rules-based accounts receivable sub-ledger to make it easy to recognize revenue on any billing model and at any volume. Our intelligent billing solution makes complex agreement considerations across multiple accounting units for every sale and order—all tailored to your company's revenue recognition policy. Learn more here; when you're ready, request a demo, and one of our experts will be glad to walk you through our platform and processes.

Gotransverse's "Don't Worry, Bill Happy" series is a "back to basics" look at foundational components of modern billing systems and processes and how the Gotransverse platform makes even the most complex billing needs easy.