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As the top line on the income statement, revenue is the first number that investors, lenders, and managers review. Investors use it to note whether the business is growing or stagnate. Bankers use it to note whether it is sufficient to cover the loan payment. Managers use it to note whether they are efficiently executing the business model. For each group, the number provides them with key information that they use to then make strategic decisions.
Due to the scrutiny that the revenue calculation receives from each group, regulators have determined that software companies should abide by a similar set of rules when calculating revenue. The most basic level of regulation lies within the GAAP revenue recognition rules. Further rules have been developed to address industry specific challenges. For example, software companies and professional service firms need to understand and implement SOP 97-2 in regards to software revenue recognition . Companies that offer bundled services need to ensure they are in VSOE compliance. No matter what industry they are in, financial managers need to make sure they are following the required regulations.
Fortunately for managers, regulators do not require them to commit all of the rules to memory. Instead, the rules can easily be built into an Enterprise Resource Planning (ERP) system which, if setup correctly, is designed to help companies stay in compliance. But ERP’s offer more than that. A good ERP system can help centralize order tracking, automate revenue recognition, and automate the billing process.
Ingredients for a good ERP
Order Tracking: In today’s business, orders can come from anywhere. In a single day you may receive an order from your website, salesmen in the field, or from a third party reseller. Each order may arrive in a different way; through email, fax, or even the phone. The order itself may be anything from a single software license to a bundled service request. To complicate matters, customer data may be tracked separately by department, sometimes in spreadsheets but more often in one-off databases that do not communicate with each other. Since orders eventually become invoices, tracking this information is important.
Revenue Recognition Rules: The rules of revenue recognition are constantly changing. As an example, new FASB software revenue recognition rules are expected to be released later this year. To stay in compliance, companies need to be constantly up to date on the latest requirements. This is hard to do when information resides on different systems that do not easily communicate with each other.
Billing Automation: Depending upon the business model being executed, accounting groups have to track and invoice for single licenses, bundled services, and subscription users. The billing type may be monthly, quarterly, or annually. In addition, if you are dealing with global customers, you need to be concerned with currency conversion within the billing system.
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If this describes your situation, an ERP system can help. The right ERP system would centralize customer information, streamline order entry, and reduce the time spent on software revenue recognition rules. ERP systems are designed to track the initial sales order and then automatically turn that sales order into an invoice in whichever currency is appropriate. The systems can also be configured to abide by various regulations such as VSOE compliance and GAAP revenue recognition.
The right ERP system can help companies gain efficiencies through centralizing customer and order information, automating revenue recognition rules, and reducing billing errors and accounting processes. With the right system, you can always be confident that investors, bankers and managers have the information they require regarding revenue.
At Bi101, we understand the components that make up the right ERP system. If you are interested in learning more about how an ERP system can save you time and money, please contact us.
