It’s a fact of life in the business world: New opportunities are usually accompanied by new challenges, and those challenges often take the form of new complexities in accounting. The SaaS model has been a textbook example of that double-edged sword for software companies. On the plus side, SaaS has been revolutionary as a fast-growing and dramatically rewarding transformation with the baked-in advantages of increased customer retention and a continuous revenue stream. It also provides valuable benefits like annual software updates and superior security.
That said, a SaaS business model does come with challenges on the accounting side due to the complexities of managing subscriptions, the ongoing revenue they generate, and ensuring compliance with the latest accounting standards. Add to the mix a legacy ERP system or a patchwork of point solutions, and it can magnify these issues beyond manageable levels.
Fortunately, you can not only tame these complexities, but also unlock all kinds of other business benefits as well.
Accounting at the Speed of SaaS: Why Legacy Systems Can’t Keep Up
ASC 606 and IFRS 15 are intended to eliminate inconsistencies in how accounting is handled for revenue from customer contracts. They provide guidance on how and when that revenue is recognized, driven by the underlying principle that revenue isn’t necessarily recognized when it’s received but rather when the services being paid for have been fulfilled.
Compliance with these standards is essential for SaaS providers, but it may be easier said than done for companies that are still working with accounting systems that simply weren’t designed to address the nuances of subscription-based business models.
That’s partly because a lot of legacy systems, particularly older systems, don’t include the functionality needed to handle recurring revenue streams. On top of all that, companies with a global presence must keep up not only with international compliance standards but also with multiple currencies.
When Your Accounting System Is Working Against You
When the current system doesn’t natively include the needed functionality, it stops being a useful tool and instead slows down progress. In these cases, frustrated finance leaders and accounting teams often resort to manual processes involving spreadsheets, which leads to a greater cost in time and effort.
Worse, these manual processes can create a drag on growth and a strain on its employees. Doing business this way may be manageable for a smaller company with fewer than 50 customers, but once you start growing and have hundreds or even thousands of customers, it quickly becomes cumbersome and difficult to keep up with.
This manual approach is also error prone. All it takes is one slip of the finger, and value is lost.
And with hundreds or thousands of customers, it’s almost inevitable that an invoice will get missed if a SaaS company relies on manually billing their customers. There are too many dates and payment terms for employees to effectively manage. This can result in both “revenue leakage” and customer disputes, which can be stressful and strain the business relationship for both parties involved.
Staying in Compliance and Keeping Auditors Happy
Another downside of the jury-rigged manual approach is that it tends to cause problems with compliance and auditors, which may result in very expensive and time-consuming audits. In some cases, it can even leave your company vulnerable to lawsuits.
One of the worst knock-on effects is that it also leaves you in the dark. The lack of a robust, SaaS-capable accounting system makes it hard to know your revenue position in real time. And as we all know, better data leads to better decision-making.
The reality is that having access to up-to-the-minute data and real-time metrics will help your business across the board.
Solution: NetSuite and SuiteBilling
The answer to these challenges is to embrace a system that will work with you, not against you.
The most efficient and streamlined solution is NetSuite, with advanced revenue recognition capabilities built right in, delivering everything you need to master the complexities of managing your revenue.
NetSuite allows you to create recognition rules for each product or service you offer, and then link them to individual line items in customer subscriptions. You can automatically recognize revenue based on predefined schedules or milestones in compliance with ASC 606, IFRS 15, and other standards. The ability to automate these processes eliminates errors and frees up valuable employee time.
In addition to NetSuite’s revenue recognition module, you can take advantage of NetSuite’s SuiteBilling module, which allows you to manage the subscription lifecycle, from launch to renewals. Its features include:
- Subscription Management: With SuiteBilling, you can manage any subscription type, from evergreen to consumption-based, and take advantage of automatic renewals.
- Revenue Compliance: SuiteBilling decouples billing and revenue recognition to streamline compliance with ASC 606 and IFRS 15 accounting standards.
- Multiple Pricing Models: SuiteBilling accommodates flat, tiered, and consumption-based options, as well as promotions, volume discounts, and customer-specific rates to deliver maximum flexibility.
- Multiple Charge Types: Capture one-time, recurring, and usage-based charges on a single invoice.
- Automated Billing: Schedule future and back-dated invoices, as well as invoices on-demand. SuiteBilling will automatically bill your subscribers at the end of a free trial or increase rates when discounts expire.
- Simplified Changes: SuiteBilling makes it easy to manage change orders, such as upsells and downsells, and ensures future invoices are prorated correctly.
- Real-Time Reporting: SuiteBilling gives you access to key data including monthly recurring revenue, total contract value, customer churn, and more to optimize profitability. Product and pricing data lets you see not only what’s happening now but the road ahead as well, so you can take action to address problems before they occur.
What Next for SaaS Providers?
The big question that remains for many accounting and revenue teams at SaaS companies is where to manage subscriptions and billing. Do you use your ERP or CRM solution? Please feel free to contact our team at Sikich, and we can work through your system landscape and requirements to figure out the best place to house these processes.