Payments Innovation

The Recurring Science (And Art) Of Revenue Recognition

The subscription or recurring payment model provides some visibility for firms, but closing the books at month end and the back end is no easy matter. Dan Burkhart, CEO of Recurly, delved into his firm’s link-up with QuickBooks Online and the issues that mark recurring revenues when it’s time to recognize the top line.

In the accounting world, closing the books is no mechanical process. In fact, when it comes to revenue recognition, there’s some art along with the science.

The subscription-based model carries with it some desirability and reliability in terms of length of customer relationship (usually) and calculated payments (read: revenue), and it may even cost less to acquire a customer. However, there are other issues to consider.

Coupons and promotional activities are part of the lure to cement relationships between firms and their consumers to keep them on board and keep new business coming in. Churn is an event that is devoutly wished to be avoided, because churn means you need to replace the lost user or lure them back. As firms — regardless of vertical, from media to business services — get larger, the moving parts of keeping track of payments, billing, cancellations and myriad other factors scale right alongside.

To that end, Recurly, which provides subscription management technology, has integrated with QuickBooks Online in an effort to automate revenue accounting with direct data feeds and reconciliation.

In an interview with PYMNTS’ Karen Webster, Dan Burkhart, CEO of Recurly, said that the partnership “will allow for transactions and invoices to flow directly into QuickBooks Online.” He noted that, upon Recurly’s founding 10 years ago, people were using QuickBooks via desktop, with an online service still in its embryonic stage. Now, with the advent of Software-as-a-Service, the relationship allows the firms to streamline the operational inefficiencies that are inherent in conducting accounting activities at the end of the month.

The businesses that would take advantage of QuickBooks Online, especially subscription-based revenue models, are those that are defined as small to medium-sized firms. Burkhart added that “we’ve been impressed by how far upmarket [the software] actually scales for companies that have digital offerings.”

Companies that offer a strictly digital subscription business (with no inventory) can easily scale into the $30 million–$50 million revenue range on QuickBooks “without any problem at all,” Burkhart said. But complexity starts to creep in, he said, when organizations get into the $300 million–$400 million size and if there is inventory (in terms of physical goods) that needs to be held. He noted that firms generally have difficulty anticipating the growth stages that are ahead of them and, as a result, may not even pay much attention to revenue recognition at the outset. That can be a serious oversight.

But growth in demand, customers and even a firm’s product offerings means that milestones are in the offing where there is an awakening that friction has welled up within the organization, and operational efficiencies erode as bottlenecks appear. Accounting operations may suffer as unwieldy processes dominate and decimate the staff as complexity creeps and compounds.

“These more complex accounting functions require a more enterprise-based solution,” said Burkhart. As for QuickBooks, he said, “we’re filling a need,” as that software did not previously have revenue recognition tools.

In the ease of adopting Recurly and QuickBooks and adding a subscription option to the business, said the CEO, firms benefit from the move by eliminating what Burkhart termed “the developer overhead” as Recurly has integrated with roughly 24 different payment gateways. This allows the merchant to simply enter their credentials for QuickBooks, and Recurly can validate and confirm that the integration is working properly.

Delving into the issues specific to the subscription revenue model, Burkhart said that customers may not necessarily just sign up and stick with a given firm.

“They typically will upgrade or downgrade, or they will apply coupons. They will add additional levels or tiers of software, for example. There are changes in what in the accounting world are called ‘amendments,’” he said.

These amendments “need to be accounted for at the end of the month,” Burkhart said.

And against a backdrop where a company can have hundreds of thousands of subscribers, reconciling the books gets knee-deep in complexity and overhead. That mandates that the end-of-month reconciliation function be automated, said Burkhart.

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