A CFO’s guide to addressing five obstacles with Recurring Revenue (hint: it's not just for CFOs)

In the “old days” we used to use the term cash cow for a sale, usually a large sale but not always, that produced an ongoing cash stream for the company. Classic examples include MS-Windows, HP printer ink supplies, the Apple iPhone, etc.; virtually every company has their own.

In the accounting world we currently refer to these types of deals as recurring revenue, a more pragmatic, albeit less colorful, term. Recurring revenues can include auto-renewing contracts, a.k.a. evergreen subscriptions, such as a SAAS subscription; and long-term contracts such as for a cell phone service.

While recurring revenue is a dream business model for many, it is not without its challenges when compared to one-time sale. And logically so. When your company makes a non-recurring sale, like selling a new computer system, you make a one-time entry into your accounting system and then go on to the next deal. (Note that I know this is an oversimplification, but please bear with me.) Contrast that with an annual recurring revenue (ARR) sale, for example, and there can be several issues that your finance and accounting team will have to overcome.

A recent eBook from NetSuite outlines several of these obstacles and how to overcome them. And it tells it from a CFO’s perspective, based on the expertise from NetSuite’s CFO advisory team. I’ve created a high-level overview of the eBook below, as well as a way to get your hands on your very own copy.

The Challenges.

Billing frequency and complexity. Recurring billing is, by its very nature, more complicated. Do you bill once a month? What day? And what if the customer adds onto the base deal and does so mid-month? Now you’ve got two billings, and you have to decide if you want to consolidate them.   

Accuracy in forecasting. The recurring revenue model usually provides a consistent and predictable source of cash flow. The formula should be simple, really: multiply the monthly revenue x 12 months x the length of the contract, right? Well, not always. Take into consideration “freemiums” – the try-it-for-a-month marketing ploy, time-based promotional discounts, volume-based discounts, and more, and you’ve got a recipe for some serious headaches.  

Revenue recognition. Newer regulations such as ASC 605 and 606 must be adhered to or your company can infer monetary fines and other penalties.

Taxes! Recording income tax and sales tax are extremely important but GAAP and the IRS don’t always agree on how it should be reported on financial statements and tax forms. Getting it wrong can be costly.  

How to Overcome the Challenges.

Automate. Automate. Automate. Automate billing, tax collection, and every other process possible. If something’s done manually, automate it. Ask your people; they will gladly tell you what manual tasks need automating.  

Improve metrics tracking. “What gets measured, gets done,” as HP co-founder Bill Hewlett profoundly stated. Use automation to track KPIs, OKRs, and whatever other metrics you use to manage your business.

Simplify revenue recognition. Use the ASC 606 standard to keep aligned with not only regulatory mandates but also best practices.

Assess GAAP and IRS procedures. To ensure compliance with both GAAP and the IRS you could generate two income statements, one for each. However, this can be tedious and error-prone if not done correctly. Implementing a system that can do this work for you is the best answer. At a minimum you must automate the manual processes, especially those involving calculations.

Implement a back-office system to manage recurring revenue.  As your company grows it must have a digital back-office system, ideally cloud-based. Startups might start with QuickBooks, for example. As you grow and your processes become more complex, especially vis-à-vis recurring revenue, you should take a look at NetSuite to help you automate the processes and improve accuracy and compliance, while at the same time reducing labor-intensive tasks. (Your employees will especially love the latter.)

More detail can be found in the eBook. Write to me at klain@kranzassoc.com and I will send you a copy.

Thanks for reading!

Best,

Kim