More than two years have passed since the revenue recognition rule came into effect. Formally, I'm talking about the Financial Accounting Standards Board (FASB) rule EITF 08-01, but because of the sweeping and significant changes it made to the way revenue from high-tech and multi-element products sales is recognized, at NetSuite we refer to it simply as the revenue recognition rule. Certainly, it has created new and complicated accounting obligations for a wide range of businesses—not just high-flying tech firms. More importantly, at its core EITF 08-01 has provided extra incentive for companies to tighten the entire sales forecasting and customer value processes by applying repeatable discipline and automation to revenue recognition.
Apple famously used the rule to enhance revenue performance by partitioning iPhone hardware and software revenue recognition streams, taking hardware as immediate revenue while spreading software revenue out over the expected lifespan of each device. Not all companies have the luxury of making a multi-billion dollar shift in top-line revenue through accounting changes, of course. But you won't know EITF 08-01’s full impact unless you have clear command over your revenue recognition options and processes, and that starts with automation.
Properly automating revenue recognition requires committing to four basic disciplines:
- Traceable: Providing complete, transparent insight into the complete sales order-to-ledger process,
- Centralized: Connecting all revenue recognition transactions directly to the customer record,
- Efficient: Eliminating reconciliations between multiple systems,
- Visible: Capable of delivering both revenue reports and forecasts in real-time.
Even today, a surprising number of companies come to NetSuite with their revenue recognition process managed in piecemeal fashion on spreadsheets. EITF 08-01 demands too much discipline; time consuming manual reconciliations that are error-prone will not scale as your business grows. Disruptive innovators like Box and Yammer (recently acquired for a handsome $1.2 billion by Microsoft) have been successful because they are free to devise complex, flexible service offerings to over 100,000 business customers each, without back-end financial constraints on contract terms and billing requirements.
Companies that automate complex revenue recognition schedules understand their income at a much deeper and granular level. Customer-by-customer revenue recognition breakdowns provide deeper insight into profitability than is possible with static, ad hoc schedules. At NetSuite, we found that an automated and tightly integrated revenue recognition process has significantly reduced the variance between sales forecasts and actuals. And we have taken the sales department out of the business of preparing complex revenue forecasts, delegating it back to the finance organization where it has always belonged—a division of labor everyone can live with!
Kimberly Odom - Director – Vertical Marketing, Software