Courtesy of umflint.edu
Let’s be honest. Accounting and sales don’t really coexist well together. Salespeople consider themselves the “main players” and look at accounting as the “score keepers.” In contrast, accounting views themselves as “stewards” of the company financials and the sales force as the people with “large expense accounts.” These starkly different views cause friction when the two groups are forced to interact. This friction is apparent when it comes to revenue recognition.
Fiction point #1 – While negotiating a contract, the salesperson includes an upfront fee which is due immediately upon signing the contract. The salesperson sometimes calls this a “processing fee” and convinces the client it is necessary for administrative processing of the contract. Upon execution of the contract, the salesperson has asked accounting to collect the fee and recognize it as sales revenue.
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In reality, according to GAAP revenue recognition rules, the company cannot recognize the fee as revenue immediately because revenue can only be recognized when delivery has occurred and services have been rendered. Since signing a contract does not provide any real service or value to the customer, this fee will have to be deferred until value has been delivered.
Management Tip #1 – Involve the accounting group early in the negotiation of all contracts. By involving accounting, they can offer revenue recognition options like tying one time fees to milestone completion. By tying fees to completion, services have been rendered and value has been transferred to the customer. Fees can be recognized at that time.
Friction point #2 – The sales team has a potential client that would like to purchase a training package. The training will last only a week. However, the customer is dragging their feet. To incentivize the customer, the salesperson throws in a 6 month license to their online software for free. The customer takes the deal and signs the contract. The salesperson asks accounting to recognize the revenue upon completion of the training since real value has been delivered.
Unfortunately, the salesperson does not understand SOP 97-2 software revenue recognition rules. Since the contract bundled both a training and license element, the firm can only recognize revenue if they have established VSOE.
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Management Tip #2 – Educate the sales force in regards to VSOE and bundled revenue recognition rules. An educated sales force will know the difference between contract elements that have established fair value and those that have not. Sales should also understand that even though software licenses are intangible and only require a simple download, they still have value. Understanding that licenses have value may encourage salespeople not to offer them so quickly as incentives.
There is an old saying that says, “Never judge a person until you’ve walked a mile in their shoes.” Although it would be helpful if sales and accounting switched roles for a while, it may not be practical. However, comprise and understanding can be earned through cooperation and education. Bi101 may be able to help with the education part. Contact us if you would like to learn more.
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