Do you run a SaaS company and struggle with appropriate revenue recognition to comply with GAAP or IFRS standards? Are you spending hours tracking customer revenue in large spreadsheets? A revenue recognition tool like ScaleXP can automate complex revenue recognition, improve accuracy and free up your time.
Recognising revenue under both GAAP and IFRS guidance follows the same core principle, which is that an entity should recognise revenue consistent with the timing of the delivery of goods or services by the seller and the realisation of value by the customer.
This can get complicated to track when the timing of invoices does not align with the timing of services delivered. That’s where the need for various revenue recognition tools come into play.
1. Text based revenue recognition
For services delivered evenly over time and invoiced in advance, this is the perfect tool. It takes the manual work out of tracking start and end dates and allocating revenue from invoiced services.
ScaleXP uses a sophisticated series of natural language algorithms to read and process all data and text on your invoices, automatically allocating revenue to the correct time period across months, quarters, and years as described in the text on the invoice.
This can be used to recognise invoiced events in a single future month, once service is delivered, or across a longer period of time when invoices are issued at the start of a longer service delivery period.
Ideal for:
- Annual software subscriptions billed in advance
- Events on a certain date
Example: Company A sells an annual subscription for Software Product Alpha, billed £12,000 in advance at the start of June and starting on the 15th of June 2024
This is how the revenue should be recognised:
- Company A should recognise £500 in the first month and £1,000 each month thereafter.
- It should defer £11,500 to a balance sheet liability account at the end of the first month to reflect services paid to it in advance, reducing that value over the length of the service period.
This is how ScaleXP handles this example:
- ScaleXP will read the words on this invoice and automatically generate a revenue schedule which allocates £500 to June revenue and £1,000 per month after that to the relevant revenue account
- This will be reflected in a summary revenue schedule which amalgamates information from all Company A’s invoices
- ScaleXP will generate automated journals which defer £11,000 to deferred revenue in the fist month and recognise £1,000 per month for eah of the 11 months thereafter
- ScaleXP will then provide summary schedules of all revenue and customer movements using this information
- It will further provide MRR reporting and metrics recognising the MRR value of £1,000 for June.
2. Rules based revenue recognition
If your products have a set delivery curve for certain annual products, such as 25% upfront after the project start date and the remainder split evenly over the next 11 months, you can automate this curve using rule based functionality in ScaleXP. Once the rule has been entered into the system, using either the issue date or project start date as your starting point, ScaleXP will automatically provide a revenue schedule which allocates revenue for future months according to the rules you set.
Ideal for:
- Services which require a fixed amount of implementation time before benefits are realised by the customer
- Services which ramp up according to a known curve
Example: Company B sells a one year contract for in January £12,000 for a software product which requires a high level of customisation, known to take 2 months. After that, the service operates at full service levels.
- All £12,000 of revenue needs to be allocated evenly across the latter 10 months of the 12 month contract
- In this case, ScaleXP would follow a rule that allocated 10% of the contract value, or £1,200 to each month from March onwards.
- ScaleXP will then provide summary schedules of all revenue and customer movements using this information.
- It will further provide MRR reporting and metrics using an MRR value of the customer’s choice, but defaulting to £1,000 (the amount if spread evenly across the contract).
3. Useage based revenue recognition
If you invoice in advance for projects or services that have project-specific delivery curves, you can create usage based rules to spread the revenue over time line item by line item, as the revenue should be recognised. These can be entered as either percents or absolute amounts and can be adjusted as necessary as project circumstances change.
Ideal for:
- Services paid in advance but delivered in chunks
- Services allocated based on utilisation which is not pre-determined nor flat across the contract period
Example: Company C sells a one year contract for in January £12,000 for a software product which is invoiced in advance based on a certain amount of utilisation, with additional charges being due once that is consumed.
- Here, the amount of revenue to recognise each month is reliant on utilisation information which needs to be entered at the end of each month.
- In this case, ScaleXP would follow a rule that allocated the contract value based on inputs provided by the customer each month; generally starting with an estimate and updating from there.
- ScaleXP will then provide summary schedules of all revenue and customer movements using this information.
- It will further provide MRR reporting and metrics using an MRR value of the customer’s choice, but defaulting to £1,000 (the amount if spread evenly across the contract).
ScaleXP makes SaaS revenue recognition easy
ScaleXP lets you get rid of tedious spreadsheet tracking of complex contracts, using automation rules tailored to your needs, whether text recognition for time based contracts or rule or usage based for more complex contracted service plans.
Unlike other revenue recognition options, ScaleXP also provides comprehensive SaaS metrics and analytics, including monthly recurring revenue (MRR), upsells, downgrades, and customer churn metrics, all in real time, and all available across a selection of reports, dashboards, and presentation options.
Moreover, ScaleXP integrates directly with both your CRM and your accounting software in a way which enables you to not only get automated journals for your month end accounting, including both revenue and prepaid cost, but also to benefit from contract management tools such as renewal schedules, invoicing from Hubspot, and revenue forecasting based on your CRM data.
