A big sales quarter has closed, and the company’s bank account looks pretty healthy. Annual contracts came in, some customers went from free trials to paid subscriptions, and you’re patting yourself on the back for a job well done. Until the revenue report comes from the finance team, that is. It makes no sense.
Why are the numbers bouncing around month to month? Nobody left; it shouldn’t be happening.
The answer is: deferred revenue.
The company collected cash upfront, which is why the bank account looks healthy. But since you haven’t earned the revenue yet, showing it in the report results in an inaccurate report.
| Deferred revenue is recorded as a liability; the business has received payment, but still owes the delivery of goods/services. – U.S. Securities and Exchange Commission |
And the more the company grows, the messier things will get. What you need to do is to stop using spreadsheets and fixing things manually because that’ll result in chaos.
If you want to learn more about proven systems simplifying deferred revenue tracking for SaaS companies, read on.
Why Deferred Revenue Starts to Break Down as SaaS Companies Grow
Deferred revenue usually starts out simple enough, but it doesn’t stay that way for long. As contracts, pricing models, and customer changes pile up, the tracking gets harder to manage.
Simple Billing Gets Harder to Manage
If you’re just starting your SaaS company, the billing side of things is pretty simple.
You have a few customers that pay month to month, and you’re totally fine having only 1 person that handles the finances. They track everything in a spreadsheet, and the work is relatively easy.
This’ll work fine for a while, but once your company starts to grow, things will change.
By a lot.
Luckily, it won’t all happen at once.
Growth Adds More Revenue Timelines
Usually, it starts with the first annual prepaid contract. A customer will pay for the entire year upfront, which will feel great for cash flow, but that revenue has to be spread out across 12 months.
This isn’t hard to track, but what if you get an enterprise customer who wants a custom schedule for billing? Or maybe you introduce a new feature that’s priced based on usage? On top of that, you might be working with different regions, which means different tax rules.
Then you have add-ons, bundled features, and everything might need its own timeline.
| Whenever a contract includes more than one performance obligation and/or variable pricing, revenue recognition becomes more complex. – American Institute of Certified Public Accountants |
Subscription Changes Make Tracking Messy
Once you try to track this day to day, that’s when the real trouble starts.
Even if you have a system in place, a customer might upgrade their plan halfway through the subscription, so now someone’s stuck with figuring out how much revenue was already recognized on the old plan versus the new one.
Then another customer decides to pause their subscription because they’re making budget cuts, and nobody knows if you’re supposed to push their renewal date out or just switch up the revenue schedule. A third customer asks for a partial refund, a fourth one has a multi-year contract, so revenue gets recognized bit by bit… It’s a mess if all you’re using is a spreadsheet.
If you’re dealing with 1 or 2 of these types of situations, you’re fine, but if you have hundreds of customers, good luck staying sane while you try to keep track of everything.
Disconnected Systems Create More Manual Work
It’s good to know that a good chunk of stress over this comes from the billing platform and the accounting software not working together properly.
| Integrated financial systems improve data accuracy, plus they reduce reconciliation issues. – National Institute of Standards and Technology |
Automation Reduces Errors and Stress
What should happen is that when the billing platform knows a customer paused their subscription or received a credit, that information should automatically go to accounting.
If it doesn’t, then someone has to manually move it over, and that someone is usually the person who’s already drowning in spreadsheets. You can fix this if you bring in a payment processor that can handle recurring billing, such as Adaptiv Payments.
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That way, your team does less manual work, which means fewer errors and less stress.
Core Systems That Make Deferred Revenue Tracking Simpler
Don’t think you need a better spreadsheet because that’ll get you into more trouble. Spreadsheets can only patch things together (to an extent), but this isn’t a sustainable way of working.
What you actually need is a system that was built for this exact thing.
Centralized Subscription Billing
If you have several billing tools that you use for different types of customers, then the revenue numbers will never really line up. You have one tool for monthly subscribers, another for annual contracts, and so on, but none of them are connected, so you can’t see the full picture.
At least not correctly.
You want a centralized billing subscription system. It can put all your invoices and contracts into one place, which means that it knows when to send a renewal notice, when to charge someone, how to handle an upgrade that comes in the middle of the billing cycle, etc.
A customer changed their plan? No problem, the system updates it automatically with both the revenue and the billing team.
And the real big win here? Reconciliation is no longer a nightmare.
Automated Revenue Recognition Rules
Just because a customer paid for the full year upfront doesn’t mean you’ve earned that money yet. If the subscription is annual, it still has to be recognized month by month, and the fee the customer pays for the setup has to be recognized only once, at the start.
If there’s a feature that gets added 3 months into a contract, you have to adjust the revenue schedule that’s remaining, but you can’t touch what’s already been recognized.
Not fun, but if you have automated revenue recognition rules, at least it won’t be impossible to track. It takes the terms of the contract and automatically builds them into the schedule, so the system simply follows the rules from then on. This is especially important for companies that have to follow accounting standards like ASC 606 or IFRS 15.
Those rules depend on a structured approach, so if you track manually, you can count on plenty of mistakes.
Real-Time Contract Synchronization
Let’s say a customer just called up and asked to downgrade their plan from premium to basic.
You update their contact in the CRM, but the billing system and the accounting software don’t get that info right away. So, when the next invoice goes out, the amount on it is wrong, and the wrong numbers keep showing up on the revenue schedule.
That’s why you need real-time contract synchronization.
It keeps the CRM, the billing platform, and the accounting system up to date on all changes. If there’s a downgrade, the recurring charge adjusts on its own, and so does the revenue schedule.
No one has to manually retype the information and most likely make new mistakes.
Deferred Revenue Dashboards and Forecasting
You absolutely have to get the deferred revenue numbers right because of compliance, and that’s what most people focus on.
But compliance isn’t the only thing you need to care about.
If you have a good deferred revenue dashboard, the finance team knows how much revenue has been earned already and how much is still waiting to be earned in the next few months. It also shows exactly when deferred revenue becomes earned revenue.
The forecasting feature is especially useful because it will help you make better decisions about hiring and spending. You no longer have to look at a static report from last month (which is already outdated, by the way); instead, you see where the revenue is going over the next several quarters.
What Makes Deferred Revenue Harder to Manage
When it comes to the accounting rules for deferred revenue, they’re really not complicated at all. You recognize the revenue when you deliver the service, not when you get the money, and that’s it.
| (ASC 606) U.S. companies must recognize revenue when control of goods/services is transferred to the customer, not when payment is received; the international equivalent of this is IFRS 15. – Financial Accounting Standards Board |
So, how come things get so complicated?
It happens because most SaaS companies build messy processes around simple rules, and then everything falls apart because you can’t stay organized in a mess.
Small, seemingly harmless mistakes are how issues first start.
A customer changes their plan, so someone manually edits the revenue schedule to fix it. Another person recognizes revenue from a cash receipt way too early because the invoice came in, and a third person forgets to update the active contracts after the prices change. This person uses this spreadsheet, that one uses another, and they don’t communicate with each other.
The vast majority of companies wait too long to fix these problems, and they always think the same way: when things calm down, then we’ll deal with this.
But in a growing company, things never calm down, and each month adds more contracts and more work.
This is exactly what you want, but if you do things manually, your revenue reports are likely full of mistakes. You’re working off of bad numbers, so you can’t even trust your own projections. And all the mistakes stack on top of each other, which means that an error from this month transfers to the next one and inevitably causes a few more.
Once the year’s done, your finance team has a crazy amount of work, and who knows if they’ll even be able to fix all the mistakes that were made?
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
Conclusion
Your biggest enemy here is the mess. And that mess comes when your company is growing faster than your operational structure.
Luckily, you don’t have to hire a whole new team or work 24/7 to fix this. All you have to do is recognize when your spreadsheets are no longer enough and switch to automated systems.
There’s really no downside to automation; you don’t even have to wait until your company is big to implement it.
Huge thanks to Adaptiv Payments for collaborating on this post!
