Many technology businesses sell services, both B2B and direct to consumers, on a subscription basis. In a subscription based business model, payment is received in advance for services which will be provided over a contracted period of time in the future. Examples include magazines, anti-virus software and software applications. The growth of cloud-based computing platforms has provided the perfect environment for companies to sell SaaS software applications on a subscription basis.
There are a variety of ways in which you can bill customers for technology subscriptions including the following examples:
- One-time billing
- Usage-based billing
- Tiered billing
Regardless of the method you choose to bill your subscription customers, for accounting purposes revenue must be recognized when it is “earned”. Revenue recognition should take place as you provide the services (earn the revenue) over the life of the subscription contract. Revenue that is recognized (earned) is reported as revenue on your company’s income statement. Revenue which has not been recognized (earned) is reported as deferred revenue on your company’s balance sheet.
The requirements for revenue recognition in a technology subscription business have recently become more stringent with the issuance of Accounting Standards Codification (“ASC”) 606. The new revenue recognition requirements must be implemented by public companies as of January 1, 2018 and private companies by January 1, 2019.
The bottom line is that if you have a technology subscription business and use a manual system for revenue recognition you will have to upgrade to an automated system integrated with your ERP platform and financial reporting systems to be able to meet the requirements of ASC 606. If you already have an automated system integrated with your ERP platform, you will need to take the steps necessary to meet ASC 606 requirements.
Some of the key steps to prepare for ASC 606 include the following:
- Automate revenue allocation
- Link billing system and revenue recognition system
- Integrate with CRM and contract data
- Provide reporting for all key constituencies
- Enable compliance with dual reporting requirements
- Speed adoption with cloud-based software applications
To meet these requirements it will be imperative for your company to have an automated billing and accounts receivable system that is integrated with your ERP and financial reporting systems. Without the tools available in an automated and integrated system it will not be feasible to prepare for ASC 606. Fortunately, cloud-based software applications are available which can help you to prepare, whether your company’s ERP and financial systems are cloud based or premise based.
Automated billing and accounts receivable software is available from Lockstep Collect, a leader in cloud-based and premise-based software solutions made specifically for businesses selling on credit. Lockstep Collect can help your company automate its billing and accounts receivable systems, and integrate them with your ERP and financial systems.
If you would like to learn more about how you can automate and integrate your billing and accounts receivable system with cloud-based or premise based solutions, please contact Lockstep Collect at www.lockstep.io.