The subscription model is changing the face of business as we know it. Subscription services of all kinds have redefined commerce, providing great value and convenience to the consumer while also giving the company the assurance that comes with a steady stream of ongoing custom. That said, the subscription model represents a certain set of challenges for business owners. If you’re new to operating under the subscription billing model you may need to redefine the way you think about payments. You’ll likely hear a lot of new terms with which you’ll need to get familiar quickly. Terms like Revenue Recognition.
At Billsby, we strive to make billing easy for subscription-based businesses and demystify the language that comes with taking recurring payments. With that in mind, let’s take a closer look at Revenue Recognition and what it means for your business.
What is revenue recognition?
In its simplest terms, Revenue Recognition is an accounting principle that identifies when revenue is recognized by the business and how it needs to account for it. In transaction-based business models, this is fairly straightforward. When a product is sold, the revenue is recognized when the customer pays for that product.
However, with the rise of Software as a Service (SaaS) and other subscription based businesses, the waters have become somewhat muddied. Payments are made for services or goods over time rather than at the point of payment.
As businesses get more and more subscribers revenue recognition can become harder to manage and this can lead to accounting inaccuracies.
What does this mean for subscription services?
In order to understand Revenue Recognition, we need to stop using the terms “revenue” and “cash” interchangeably. Just because we have revenue doesn’t always mean that cash is received.
Revenue Recognition ties in with the accrual method of accounting. This means that revenues are recognized when the customer receives their goods or services rather than when your business receives payment from the customer.
Tax laws have changed to accommodate a growing shift towards the subscription model. As of 2014 the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have issued a set of uniform guidelines across all industries known as the Accounting Standards Codification (ASC) 606.
Under these guidelines, five steps are needed to satisfy the principle of Revenue Recognition:
Establish the contract with the customer.
Identify your obligations to them.
Determine the price of subscription.
Allocate a determined price to the contractual obligations (i.e. goods and services covered by subscription.
Recognize revenue when you fulfil your obligation to the customer by providing the service or supplying the product/s.
How we can help
We understand how daunting it can be moving to a subscription-based business model. We’re here to give you practical help and support in all matters relating to subscription billing. We can help with every step of the customer journey from getting them signed up to managing payments and even making sure that they don’t drop out.
Want to know more about what our range of solutions can do for you? Click here to schedule a demo.