For most SaaS businesses, it’s a fiendishly hard task that takes up at least a day every month – and often even more. But it needn’t be like that.
Andy Jackson, iplicit’s Financial Controller, shares his experience of just how complicated deferred revenue can be – and how it now takes him no time at all.
Month-end can be a brain-straining slog for a SaaS business’s finance team – and there’s one job in particular that I used to dread.
That job consists of revenue recognition and deferred revenue postings. It’s a headache-inducing task that can easily take at least one day a month and probably cause you to cancel any evening plans too.
In previous SaaS businesses I’ve worked for, there was no alternative to doing it yourself. Yet it can be carried out at the push of a button.
If you’re in finance for a SaaS company, you’ll know how complicated accounting for software subscriptions can be.
The details of each customer’s subscription – when it was taken out, when it started, how long it runs – are generally entered into a spreadsheet.
When month-end approaches, someone has to go through that spreadsheet and release the right amount of revenue (usually one twelfth of the invoiced value) into the P&L for each customer.
If a trial balance in the accounting system doesn’t agree with what’s in the spreadsheet, then you need to examine everything line by line, which can often mean dissecting formulas to spot the error!
Things get even more complicated if the customer pays for a longer subscription (three years is not uncommon) or buys additional services which are paid for up-front.
Multiply all this by, say, a couple of hundred invoices and imagine it growing exponentially for the next few years. That will give you an idea how complex the job is likely to get – and might prompt you to consider a career change.
Most SaaS finance teams have had no choice but to keep doing revenue recognition the hard way.
In the past, the only way to automate it was to upgrade to a system designed for big corporates that might cost you £50,000 a year or more – or pay perhaps £10,000 a year for a revenue recognition product that could be bolted onto your entry-level software with all its other limitations.
In my own previous roles, I couldn’t justify buying expensive add-ons for Xero, so I just carried on grappling with those spreadsheets and wondering what it was like to have a social life when month-end was approaching. But, as I’ve written before, I hadn’t used iplicit until I came to work for iplicit.
Because revenue recognition is so head-numbing and time-consuming, other vendors thought they could pretty much charge what they liked for software that would take it off your hands.
iplicit has put automatic revenue recognition within the reach of tens of thousands of medium-sized organisations. Having an affordable mid-market option changes the game.
How long does it take me to handle deferred revenue now that I use iplicit? Just about no time at all. The push of a button pretty much takes care of it.
The software knows how the revenue from each invoice should be applied, because we give it that information when the invoice enters the system.
When month-end comes around, the only human input that’s needed is to review what the software has produced. That probably takes me about 10 minutes.
What’s more, I can run a report that shows what my monthly recurring revenue (MRR) is this month and how it stood last month identifying any changes.
I’ve said goodbye to the spreadsheet.
If anything has gone awry, it will be down to an inputting error. That can happen in any system of course, but it’s easily spotted – and since a sales invoice will already have been through an approval process, any mistake will probably have been picked up then, rather than at month-end.
If your revenue recognition process is difficult and time-consuming now, it’s only going to get worse as the business grows.
Many SaaS companies aim, like iplicit, to double in size year-on-year.
Are you really set up to handle four times as many of these calculations in just two years’ time? And how long is it going to take to finish your month-end close then?
You could switch to a more capable finance software system now, or you could leave it until revenue recognition is taking up even more of your time and mental bandwidth.
When you calculate how much of your finance team’s time is spent toiling in spreadsheets – and consider what they could be doing instead – it makes sense to upgrade as soon as you can.
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