Project-based organizations that are evaluating new ERPs are often looking for a system that handles numerous requirements, and revenue recognition is often a critical need as older ERP systems are not able to meet the ever-changing revenue recognition standards. NetSuite’s Advanced Revenue Management module is fully integrated with projects and sales orders and can help project accountants take a systemic approach to managing, forecasting and ultimately posting revenue on a monthly basis for their projects.
When implementing revenue recognition for project-based organizations in NetSuite, the first critical decision is determining whether or not to use the project-based revenue rules or to have NetSuite trigger a revenue arrangement from a sales order. Oftentimes, professional services organizations spend a considerable amount of time on SOWs or Work Orders outside of their ERP systems and do not see a need to enter these into their ERP. Having a sales order is useful if the organization is recognizing revenue based on a straight-line methodology or the services are part of a bigger contract (i.e., for IT services firms that are selling software and services), and a revenue allocation is required. For other organizations, a sales order isn’t required as the project can represent the revenue contract and project revenue rules can be used to determine when and how to recognize revenue.
This blog is going to highlight NetSuite’s project-based revenue rules and identify a key rule that NetSuite removed in 2021.
Fixed Amount Rule
Fixed amount rules allow customers to tell NetSuite when revenue should be recognized. Some examples of when clients could use this rule include recognizing the same amount each month over the course of the year or taking revenue when a task is completed. Ultimately with this rule, the project accountant is responsible for setting up the system to take the revenue when they see fit.
Percent Complete Rule
Percent complete rules are heavily used by organizations that bill clients fixed fees, such as retainers or even grants. NetSuite calculates percent complete based on the total hours of actual work-to-date divided by the budgeted hours. NetSuite gives clients an option on how they would like to use the system to define budgeted hours. These hours can be the sum of planned hours on the project when assigning resources to tasks or the sum of hours that are allocated to the project if you are using the resource allocation module. Ultimately, once the percentage is calculated by the system, it can be applied to billing rules to manage and take revenue in a given month.
One important feature to not forget about is NetSuite percent complete override subtab, where users can override percent complete values. In addition, a .csv import exists for this subtab if percent complete is derived differently (i.e., based on cost or input from project managers that do not have NetSuite access).
As Charged Rule
As charged rules for revenue recognition often help clients take revenue in line with their invoicing. When a charge is generated to be put on the invoice, it is also available to recognize as revenue. This rule is very useful for time and material projects.
Removal of Labor Based Rules
NetSuite used to have a labor-based rule that allows clients to recognize revenue based on hours worked multiplied by a billable rate, regardless of how the fees were billed to a customer. Some of our clients used this rule to recognize revenue based on hours worked against fixed-fee contracts. Last year, NetSuite announced the deprecation of this rule, and they are encouraging these clients to switch to the percent complete recognition rule.
Have any questions regarding NetSuite Revenue Recognition or any other questions about using NetSuite? Please reach out to one of our experts at any time!