QuickBooks is ubiquitous with small business. According to the NPD Group, a market research company, when it comes to accounting software within small businesses, QuickBooks has about 90% market share. This kind of market share is only obtained by making strategic tradeoffs in functionality. To address the needs of the mass market, the software is tailored to the lowest common denominator or general customer. This results in Intuit not including specific functionality for software companies because it is not required by any other industry. In particular, QuickBooks cannot make the revenue recognition calculations specific to vendor specific objective evidence of fair value.
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Requirements to calculate Vendor Specific Objective Evidence
The purpose of vendor specific objective evidence calculations is to prove that the company has set a fair price for a software product. The main rule for determining vendor specific objective evidence for a software product is to set the price for a specific functionality and not adjust it. The software features must be the same on each sale and the price must be consistent. If software is modified in any way, then it becomes a “new” product and revenue recognition must be deferred until the contract is complete.
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Once the software is commercialized, the final sales price for that product is tracked. This is easy if the software is a standalone product. However, if the product is bundled and sold bundled with services or post contract support, then the final sales price must be broken out and assigned to each individual element before it can be tracked. Once enough sales have been made, the final prices are graphed. If 80% of the distribution falls within 15% of the median, then vendor specific object evidence has been proven and revenue can be recognized upon delivery but before the other elements are delivered.
QuickBooks Account Structure
QuickBooks does not bill itself as an Enterprise Resource Planning system (ERP). It is a bookkeeping system that is designed to help small business track their invoices, inventory, and general ledger. Within the system, revenue is usually booked only once a month, as a lump sum. Any calculations performed to arrive at the booked sum were performed elsewhere.
Since it is a book keeping system, it is not equipped to perform vendor specific object evidence calculations. Software companies that are running QuickBooks perform these calculations within a spreadsheet.
Use of Spreadsheets to Calculate Vendor Specific Objective Evidence Calculations
Software companies that decide to use spreadsheets start the process relatively confident in their ability to perform the needed calculations. Prices are tracked, bell curves are created, and simple formula magic will provide the required 80/15 rule. However, as more products and services are added, the spreadsheets begin to be unruly. In addition, management may also decide that they want to track the sales price by geography and customer size to provide more pricing options for customers. These kind of request can turn a simple spreadsheet into a nightmare.
Alternatives
QuickBooks and spreadsheets are not the only alternative to tracking vendor specific object evidence calculations.
There is NetSuite.
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NetSuite offers the ability to perform the calculations directly within the software. The bell curves can be divided and sorted any way management chooses. If you are interested in learning about what NetSuite can do for your company, contact us today.