You’ve heard about the new revenue recognition standards that will be officially taking effect in 2017, but have you considered all the ways your organization will be affected? Revenue recognition has broad implications for your business but by preparing accordingly you’ll be able to reap a few major benefits. These changes will have an effect on more than just your financial accounting department and are intended to drive your company towards better, more transparent accounting practices. What factors do you need to consider in order to model the full impact in advance?
Revenue recognition practices begin in your accounting department, but where do they end up? Changes to how your company is recognizing its revenue can have a variety of downstream effects on other departments and on your employees – in particular on your sales department. Quarterly revenue numbers are likely to change purely as a result of how your organization recognizes revenue. As a result quotas and commission structures may have to change as well. This in turn means that your incentive system for the sales team may have to be revised. Finally all this information needs to be communicated clearly to your employees so that they know what to expect, how to react, and what their continued performance means to the company.
The new standards are, at their core, about a more detailed understanding of where your revenue comes from. Are you fully prepared to match costs with revenues in your current system? To do this requires a nuanced view of what costs go into generating revenue over time and as part of the new revenue recognition standards you absolutely need to be able to capture the costs of making a sale accurately. Once you do that, the costs must be capitalized and amortized over the life of the sale and linked directly to your revenue recognition of that sale. This can get tricky – particularly if your company bundles services over an extended period of time. The good news is that a robust ERP system (like NetSuite) can handle this level of reporting complexity.
The bottom line is that more granular, detailed reporting of your company’s revenue and cost structures is a positive step forward. Doing this correctly provides you with a much clearer picture of your organization’s financial health and makes it much easier to track important trends over time so that you can not only understand the present but predict the future as well. Public and private companies will both benefit from the added transparency to investors while adapting their practices to comply with the new regulations. Still a bit confused about how to prepare appropriately for the new revenue recognition standards? Reach out to us anytime for a more personalized look at how great ERP software can help, or check out some of our amazing company success stories here.