This question was posed by an anonymous Controller yesterday on Proformative: "Is there a revenue recognition software that is ideal for SMB's?"   As one of their Topic Experts, I provided a brief answer there, and wanted to expand on that further here.

While there are a number of industries with complex revenue recognition requirements, I think it’s safe to say that, in general, technology and software companies are the largest affected segment, as well as the most affected.  For these companies, the ability to scale quickly is often a critical business need.  Given that, a better way to state the question might be: “Is there a revenue recognition solution that will scale with our business, supporting the pricing and performance our company needs now and as our organization grows?”

One challenge for people in technology-related companies is that their expected capabilities are often set by expectations of upper mid-market or enterprise sized businesses in their industry.  These expectations can be a serious mismatch when the company’s current budget and/or transaction volumes fit what you would expect in the SMB market.  One of the main reasons to consider a revenue management solution is to meet the increased challenges and expectations that result from growth.  In this environment, what was easy to manage in a spreadsheet yesterday may quickly become unstable and unscalable.

My company has been offering revenue recognition applications for nearly five years.  Our customers span businesses from “early ramp” to large midsized organizations ($500M+). To the question’s point – yes, solutions are readily available which may be ideal for SMB’s.

 If you haven't looked at what's new in revenue recognition software lately, you may be in for a surprise.  Tensoft Revenue Cycle Management (RCM) handles the thorniest complex revenue, contract and/or billing management issues for technology companies with ease – here’s a chance to see if it might be a good fit for your needs!

Just register on our Resource Center for access to this on-demand webinar, “Graduate From Spreadsheets to Tensoft Revenue Cycle Management (RCM),” recorded on 2/15/12. 

Besides an introduction to Tensoft RCM, this webinar addresses some of the key questions that technology companies must ask when they evaluate their needs:

Productivity: Duplicate data entry can introduce errors and sap company resources. How can you find the right systems and processes to help your company speed revenue workflows?

Streamlining Revenue: Auditable and traceable systems enabling consistent revenue recognition. How important is improving the quality and velocity of your revenue while lowering audit costs?

Regulatory Compliance: Revenue and audit regulation complexity adds cost and risk to your organization. How can you consistently support these needs while lowering your risk and cost?

Visibility: Many Financial Executives would like greater insight into revenue data and processes. What could you do with increased visibility into your data?

 If you have any difficulty accessing this, just let me know and I’ll register for you!

 The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have recently published important exposure drafts on “Revenue from Contracts with Customers.”  The proposed joint standard seeks to clarify the principles for recognizing revenue and to adopt a single revenue model for both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) reporters, across industries and markets.  If adopted, this would represent a significant step toward global convergence in financial reporting.

These proposed standards will likely result in significant changes in the key financial performance measures of many companies, in many industries.  For most, this will require changes to the business management systems that measure and recognize revenue, as well as updates to revenue recognition process controls.  Although the effective date is no earlier that January 1, 2015, it’s not too early to prepare, since this may take substantial planning and effort to implement, depending on your company’s current contract and revenue processes.

Tensoft will be providing further insight to our customers, partners and other interest parties, including an upcoming webcast on March 13 – just in time to help inform any additional comments that you’d like to make on the exposure drafts! 

 Revenue management functionality is available either as part of a few financial and accounting software solutions, or as an independent solution that provide some level of integration to your system of record.  Vendors on both sides can be glib about their product’s ability to handle anything that you can think of.  If your company is in either the technology or software industries, you’re probably well aware that your needs in this area are beyond what most solutions are designed to handle.  When in doubt, be sure that the vendors that you’re considering can demonstrate - not just talk about or give a slick slide presentation on - the following capabilities:

1)    Ability to handle multi-element arrangements.

2)    Robust support for fair value methodology.

3)    The system can match the transaction flow of your go-to-market model(s), providing, for example, contract administration or integration to your website or CRM system.  

This is just a starting point, of course, but these three points will help narrow the field a bit.

 When software companies are interested in Tensoft's Revenue Cycle Management (RCM) product, we first try to determine a fit for their requirements, so that no one's time is wasted.  Even if they have not yet created a requirements document, we find that a lot can come out of considering these three variables:

1) Billing. How does your company go to market (eCommerce, enterprise agreement, channel model, etc.)?  You'll want to look for a billing system or a billing support system that matches your go-to-market model.

2) Revenue Recognition. The rules for software industry revenue recognition are complex and changing. For the basics, you'll need a sub-ledger for deferred and recognized revenue analysis and appropriate methods and models to support your revenue recognition models.

3) Revenue Compliance. Could be part of the above, but is often a sub-set of that, and one that not every company needs.  There is no easy way to describe this, but if you have a sales process with multiple related elements in it (like software plus maintenance), and there are different recognition periods for the elements, you are most likely subject to more complex accounting guidelines.

Tensoft Revenue Cycle Management (RCM) supports billing requirements as well as complex software revenue recognition and contract management.

 Multi-element arrangements are created when multiple inter-dependent items are sold to customers.  For SaaS companies, some examples of this include: setup fees, subscriptions, training, and professional services.  When multi-element arrangements occur, they’re subject to EITF 08-01.

Consumer businesses may try to eliminate the multi-element arrangements requirements of EITF 08-01 by offering only subscription licensing.   However, companies who are in the business-to-business space often don’t have that option.  Your market will dictate what mix of products and services that you need to offer your customers, not the hope to streamline the revenue recognition process.

A special scenario occurs when you offer product modifications – where there is a required delivery component tied to the subscription sale.  This scenario can require the use of SOP 81-1, along with EITF 08-01.  SOP 81-1 requires recognition of software revenue based on the delivery of the required modifications, often by percent complete methodology.

Often these product modification scenarios are something that happens early in a company’s history, when your product is still maturing.  If this is the case, the need to offer product modifications should disappear as your product matures and your installed base and reputation grow.  However, if offering product modifications is part of your long-term go-to-market strategy, then you may want to look at options such as isolating the customization layer in your product so that it becomes an implementation challenge rather than a product extension requirement.

Whenever possible, it’s reasonable and smart to try to simplify revenue recognition requirements.  A revenue recognition expert can help with planning for this, as well as providing tactical assistance with agreement negotiations, to make sure the agreement optimizes your revenue opportunities. 

 Re-posted from ERP SoftwareBlog:

Think for a minute about how ubiquitous software has become.  How many everyday consumer products, such as mobile devices, have embedded software today?  How would businesses function without software?  How many online services depend on software to take care of their customers?  Every day new smart products or helpful services are created – software is pervasive.

When software (or software based) products are sold the sale is often a combination of related items.  One example of this is the sale of software plus maintenance.   These are normally sold as two separate line items but are inextricably related to each other; so they constitute a multi-element sale.   Another example is an online subscription that includes setup as well as ongoing service.  A multi-element sale is, simply, the sale of multiple related items to a customer.

Okay, so lots of companies are affected – what’s the big deal?  The issue is that the EITF and the FASB have recently issued guidance that many companies have not yet adopted, and their auditors are starting to call that to their attention.   We’re seeing – and hearing about – significant amounts of pain at companies who have not yet analyzed their various sales arrangements and taken steps to ensure correct revenue recognition for such multiple-deliverable arrangements. 

Tensoft can help.   In addition to Tensoft Revenue Cycle Management (RCM), a suite of products that brings together the specific revenue recognition, recurring billing, and contract management functionality that today’s technology companies need, we offer an optional Compliance Module.  Integrated with Microsoft Dynamics, the determined rules are applied based on sales transactions, the appropriate method, and the independent revenue valuation for each item.   With fully auditable processes and reports,   Tensoft RCM is the only solution of its kind that has passed the rigorous Certified for Microsoft Dynamics (CfMD) testing process. 

For additional information about this topic, you may want to review the recorded webcasts in Tensoft’s Resource Center (www.tensoft.com/resources), including “EITF 08-1 and the Relative Selling Price Method for Multiple Element Arrangements.”  This webcast was presented live on 9/20/11.  Tensoft regularly hosts webcasts that are eligible for CPE credit, and is an accredited member of the National Registry of CPE Sponsors.

 Accounting for multi-element sales has quickly become one of the most complex areas of revenue recognition, a topic that affects most technology companies.  A multi-element sale occurs when two or more related product components are sold together at the same time.

The classic example of the multi-element sale is software plus maintenance. These are normally sold as two separate line items, but are inextricably related to each other, so they constitute a multi-element sale.  Beyond this relatively simple example of a multi-element sale, think of all of the everyday consumer products that we use where software is embedded, such as a mobile device.  Or think of an online subscription that includes setup as well as ongoing service.  In accounting terms, a mobile device is hardware, software and service. These multiple elements need to be treated separately in order to properly determine revenue.

The other day I saw an advertisement that said: “60% of the new products introduced in North America this year are ‘smart’ products – products with some sort of ‘smart’ or intelligent feature associated with them.”  As technology becomes more pervasive, more products become subject to the rules governing multi-element sales.  At what point do technology revenue recognition rules become the norm instead of the exception? 

I wanted to alert the Tensoft blog community that we’re now installing the Advanced Revenue Compliance Module for our Tensoft RCM Suite for customers who are currently running RCM, RDM or RDM-D. This is timely news, because this new module is designed to automate and streamline compliance with new FASB and AICPA rules that went into effect this month (January 2011).

If your company falls under the U.S. Financial Accounting Standards Board (FASB) rules for multi-element sales, known as EITF 08-01 and EITF 09-03, or statutes such as AICPA SOP 97-2 for software companies, the sooner you begin tracking the necessary data, the better. Available immediately as a cloud application or installed in-house, our new RCM Compliance Module plugs into your existing Tensoft software to flawlessly track all necessary data.

Now, of course, new customers are also welcome to add both the Tensoft RCM suite and the Compliance Module from scratch. If you have friends whose businesses fall under these new rules but are still tracking revenue longhand with spreadsheets, be sure to pass this information along to them. Sometimes it takes “one more onerous new regulation” to spur a company into finally automating their revenue compliance process. We’ve seen it time and time again.

Take a look at our recent press release for more details, and contact me at (888) 450-4030 x406 or via email for more information – or to jump-start the process of adding the RCM Compliance Module to your system. 

Happy New Year!