If a company continues to use manual spreadsheets for tracking deferred revenue and contract assets, as soon as the company reaches $20 million in annual recurring revenue ($20,000,000+ ARR), the company will no longer be able to close its books at the end of the month.
Financial spreadsheets have been shown to contain structural errors in an astonishing 88% of cases. A technical audit must be able to demonstrate that the company's systems are in compliance with ASC 606 and IFRS 15 accounting standards, at a system level.
The following technical breakdown provides a detailed overview of how the leading accounting and billing systems process complex contract modifications, multi-element usage billing, and enterprise-grade (e.g., global) journal entries.
Why a 15-Day Close Means You Need SaaS Revenue Recognition Software
Most finance teams will fail to recognize the limits to the use of manual accounting processes until the company's growth disrupts those processes. The first indicator that your company's systems are not capable of handling the amount of data being generated each month is a month-end closing that takes more than 15 days.
For very early stage companies, it is possible to use the straight-line recognition (SLR) method to recognize the revenue for a simple monthly subscription, but that model will break down as soon as the sales teams introduce complex revenue recognition methods, such as hybrid billing, milestone services, and mid-contract changes to contracts.
What worked at $5 million in ARR will not work at $20 million in ARR.
The root of the problem is not the manual processes themselves, but the data governance between the CRM, billing engines, and general ledgers.
If a sales rep upgrades a customer during the middle of a 12-month contract, the entire revenue schedule must be recalculated as a result of that one event. Under a manual system, the accountant will need to extract the data from the source systems, verify the new standalone selling price, adjust the deferred revenue balance, and then post the appropriate manual journal entries to record the transaction.
The combination of all of these activities will create delays in the close process that continue to increase with the size of the company.
When multiplied by the hundreds of contract amendments executed on a monthly basis, this results in an increase in the percentage of errors.
Hence, implementing SaaS revenue recognition software should not be considered an option for any expanding company but is instead a fundamental necessity for succeeding while growing.
How the Five-Step Accounting Rules Work
All SaaS revenue recognition software tools that were examined in this section claim to automatically allow compliance with the ASC 606 and IFRS 15 standards. To grasp what an application is doing, you need to have a basic understanding of the five-step model that the application executes behind the scenes.
The application identifies the contract between the organization and the client.
The application identifies all separate performance obligations that exist within the identified contract.
The application identifies the overall transaction price.
The application then allocates the overall transaction price across each of the performance obligations based on their respective standalone selling prices.
The application recognizes the revenue associated with each of the company's performance obligations when the obligations are satisfied.
Although the theoretical application of this model appears simple, the reality is much more complex.
If your SaaS organization sells an annual membership (authorization) fee associated with the software product as well as a one-time implementation fee, the application must allocate the revenue from the implementation fee separately from the revenue generated from the software license. The implementation-related revenue can be recognized at the completion of the implementation project, while the software license revenue will be recognized over a period of 12 months.
Therefore, if the application cannot correctly allocate performance obligations and/or accommodate multi-element contracts, the finance department would need to revert to using Excel to calculate the appropriate allocations.
Fixing Contract Changes and Cleaning Up Your Data
A true measure of any finance application is its ability to process exceptions, such as contract modifications. Within a rapidly growing SaaS company, it is expected that there will be upgrades, downgrades, cancellations, and refunds occurring on a daily basis. When the software experiences changes, it must determine whether the change creates a new contract separate from the original or modifies the original agreement.
This is the most common point of failure for software implementations.
For example, if you downgrade your plan in month 4, a properly configured implementation will adjust the revenue recognition for the next 8 months without breaking the historical data for the first 3 months.
A poorly configured implementation will create a retroactive adjustment that will change the reporting period of the closed reporting periods and change the ability to perform an audit of your business’ financial information. High-end implementations have strict logic to manage the way you will manage your revenue recognition moving forward. The best way to get the software set up properly is to clean up your historical CRM data before your new automation tool is deployed. Cleaning up your data before the deployment of your new tool will give you the opportunity to start fresh.
Dividing Work Between Finance and Sales Teams
Implementing new SaaS revenue recognition software will force you to make tough decisions regarding the workflow ownership within your company. The finance team needs defensible audit trails and accurate journal entries, while the revenue operations (RevOps) team needs speed in the quoting process and ease in the renewal of contracts. When a billing issue arises due to disjointed billing schedules, conflict arises between the two departments.
The trend in the marketplace is clearly moving towards a more integrated approach to revenue recognition as part of the total quote-to-cash workflow, rather than revenue recognition as a standalone accounting process that happens at the end of the month.
To prevent confusion or conflict between the finance and RevOps departments, there should be explicit data governance rules that dictate exactly who has the authority to override the system-generated billing schedule. If a billing dispute does occur, the software should provide an exception handling queue for the users. Without proper access restrictions on records, a sales team can change contract start dates and make their numbers, but this skews the entire ASC 606 allocation.
The best software solutions will restrict financial data access while providing RevOps the flexibility needed to operate in the CRM environment.
Top 11 SaaS Revenue Recognition Software
This technical evaluation highlights the leading platforms in the following areas: contract complexity, pricing models, and direct integration with leading ERP systems (e.g., SAP, Oracle).
1. Zuora RevPro
As the largest and most robust SaaS/software company on the market, Zuora is rated 3.9 out of 5 by G2 Crowd for its ability to handle massive amounts of complex contract modifications in a very high-speed environment across 1M+ subscriber accounts.
Zuora separates the billing timing from the revenue timing and allows companies to collect cash earlier while still meeting ASC 606 compliance when recognizing revenue.
The technical innovation of RevPro is its "automated grouping logic".
When a large enterprise customer purchases multiple software, training credits, and usage-based storage across several different dates, RevPro will automatically link each of those purchases into one master contract for accounting purposes. It will also calculate the standalone selling prices for the entire package. This eliminates the need for manual grouping. However, the high-end innovation requires highly technical installations. Therefore, it's not generally considered a good fit for startups; however, it continues to be the most accepted standard for many global companies with highly complex multi-element contracts.
2. Younium
Younium is focused exclusively on B2B SaaS businesses and provides full visibility and control over billing and financial reporting for SaaS companies.
Rated 4.4 out of 5 stars on G2, Younium is a connector between the customer's customer relationship management (CRM) software solution and their general ledger (GL). Younium creates structure for businesses that may have multiple entities and currencies to work within, minimizing the end-of-month chaos experienced by many accounting teams.
Younium offers a specialized solution to the common pain points that surround managing B2B contracts.
Younium provides support for tiered pricing, annual upfront billing, and mid-term amendments for contracts — all natively. Younium automatically creates journal entries for accounts receivable and deferred revenue. By integrating with major ERP systems, Younium shows finance executives what recognized revenue will look like over the next 12 to 24 months through clear revenue waterfalls. The strict focus on B2B makes Younium less useful for high-volume, low-cost B2C companies; however, it delivers exceptional value within its target market of B2B companies.
3. Maxio
Maxio was formed by the merger of SaaSOptics and Chargify to create a platform that provides a solution geared towards growth of a business in the SaaS space.
It is rated 4.3 out of 5 stars on G2, targeting companies that are growing aggressively from $5 million to $50 million in annual recurring revenue (ARR). Maxio has a clear tiered pricing structure with a Build tier offering 30 days free and then a Grow tier starting at $599 per month, while custom pricing is available for Scale tier customers.
Maxio has an excellent reporting engine, which tracks all core SaaS metrics, while also complying with strict GAAP standards.
Maxio handles the complexity of upgrades and downgrades, quickly calculating proration amounts and adjusting the deferred revenue waterfall in real-time. Additionally, it can generate the journal entries required by an auditor.
The billing module that manages both the actual billing to customers and the accounting for that billing reduces the risk of discrepancies in the revenue and billing information recorded in the ERP and billing software. Therefore, for a business that has grown beyond simple accounting software and is not ready to implement an expensive and complex enterprise-level ERP, the billing software is an excellent transitional product.
4. Tabs
Tabs has been developed with a focus on addressing the evolution of billing models toward a combination of usage-based and hybrid pricing.
Tabs now has over 30 percent of its clients, including current customers, utilizing a usage-based pricing model within 30 days of joining Tabs. Focusing on helping clients reduce the manual work required to collect receivables, Tabs automatically aligns client revenue data with the consumption of services and products by the client's customers.
The performance metrics associated with Tabs implementations document the high rate of return for clients' operations. For instance, one of Tabs' clients, Statsig, decreased their aged accounts receivable to zero and processed three times the volume of invoices they would have been able to generate without increasing staff.
Another Tabs client, Cortex, decreased the value of overdue invoices by 50 percent.
The standalone sales price of the products invoiced on a usage basis fluctuates frequently. Tabs captures the variable pricing information of each invoice and automatically produces the required monthly true-up entry to comply with ASC 606 without affecting the original sale contract.
5. Stripe Revenue Recognition
The Stripe Revenue Recognition automated reporting tool was created to function smoothly with the overall Stripe ecosystem of payment processing tools.
Based on the 4.2/5 rating on G2 for the Stripe Revenue Recognition tool, Stripe is the best fit for companies using a PLG strategy to grow by developing new products while accepting credit card payments through Stripe's processing system.
The Stripe standard processing fee is 2.9 percent of the total value of a successful transactional charge and an additional $0.30 for each successful domestic credit card transaction, and the Stripe Revenue Recognition module uses all of these transaction data for reporting on the immediate revenue generated from each charge. If your data is already stored in Stripe, then you don't need to set up any additional technical components.
It performs automatic management of upgrades, downgrades, and refunds, by recognizing revenue using either the standard incremental method or custom recognition methods that you configure. It’s particularly designed to handle high-volume subscription SaaS products, with standard pricing models. However, companies that rely on custom enterprise-level contracts, manual invoicing outside of Stripe, or complex implementations with multiple custom conditions will reach the limitations of its recognition rules quickly. It is best suited for high-volume, low-touch business models.
6. Agentforce Revenue Management
Agentforce Revenue Management, which is a product of Salesforce, provides a means to connect the quote process directly back to accounting. With a G2 score of 4.2 out of 5, the pricing ranges from $150 per user/month billed annually to $200 per user/month billed annually.
This product supports the industry's move to treat revenue as a unified quote-to-cash process instead of a separate finance function.
The system operates from Salesforce as the only source of information and therefore creates a single point of view about revenue recognition within the organization.
When sales representatives configure complex quotes for hardware, software, and services using CPQ (Configure, Price, Quote), Agentforce links these items directly to the applicable recognition rules. In addition, if any amendments are made to a contract within a given year, the allocations will automatically recalculate by the software. This prevents the situation in which sales has created a custom bundle and finance must spend multiple days determining the appropriate accounting treatment.
A commitment from the user to build on the Salesforce platform is required to utilize this tool effectively.
7. NetSuite
NetSuite is a full-service ERP solution with significant integrated revenue management features. Rated 4/5 on G2, NetSuite is the standard endpoint for growing SaaS companies that previously used traditional accounting methods (known as “disjointed software stacks”). The Advanced Revenue Management (ARM) module is built to manage complex situations not covered by ASC 606 and IFRS 15.
The NetSuite platform has a rigid multi-book accounting model, which enables a company with a global footprint to record revenues in accordance with U.S. GAAP in one ledger and at the same time record the same contract for European tax purposes in a separate ledger.
Additionally, NetSuite provides automated calculation of standalone selling prices, tracking of contract assets, as well as consolidation of multiple entities with complex financial reporting needs. One of the downsides to implementing NetSuite is the length of time it takes to deploy. A NetSuite implementation takes many months to complete from the time the system is purchased to when it is actually deployed into production; there will be an extensive amount of time spent on mapping, testing, and migrating data to the system.
Because of these requirements, implementation of NetSuite is not a quick fix; it is a permanent infrastructure commitment.
8. Sage Intacct
Sage Intacct, which has an overall rating of 4.3/5 on G2, is a powerful platform for mid-market financial management. Sage Intacct is known for its robust dimensional reporting capabilities as well as its stringent compliance controls. For SaaS companies, the native revenue and contract management modules in Sage Intacct enable companies to manage the complete lifecycle of both subscription and usage billing.
Sage Intacct is very capable of managing many types of deferred revenue waterfall scenarios. When your organization has hybrid contracts (one that includes a subscription component and a usage component), Sage Intacct allows finance teams to assign separate templates for revenue recognition to each of the different line items on a single invoice. This capability allows for a more powerful audit trail that details the source of each system-generated journal entry.
Companies looking for complete audit readiness and do not want the costly operational burden of a traditional global ERP project can find the right solution in between the ERPs and basic accounting systems.
9. SAP S/4HANA
S/4HANA from SAP ranks highest among all ERPs on G2 for its advanced capabilities to address the needs of large, multi-national enterprises, receiving a G2 score of 4.2 out of 5.00. SAP's RAR revenue recognition model supports the most complex contract requirements across various international divisions. SAP has prepared well for the technical aspects associated with historical compliance deadlines across public and private markets.
The system has the ability to track enormous quantities of variable consideration.
For example, suppose that a multi-national SaaS provider achieves a multi-year contract with performance-based incentives, capped usage billing, and inflation-indexed pricing. When determining the price of the transaction, RAR from SAP is able to provide details for the exact amounts allocated to each element. Establishing a strict data governance framework is necessary before RAR can process transactions.
Once installed, RAR requires that companies reorganize their entire corporate data structure to comply with the strict data processing guidelines as specified by SAP, resulting in a significant upfront infrastructure commitment on the part of the enterprise. In many instances, companies that need to achieve compliance for revenue accounting must choose between the scalability provided by SAP and the flexibility of other ERP solutions.
10. Workday Financial Management
Workday Financial Management provides a complete human capital management solution fused with finance and accounting functions. Workday's approach to revenue recognition uses a single unified data model, so Workday never waits for batch processing from external systems.
Workday excels in service-based environments where the costs of providing the service are directly tied to milestones related to the revenue generated.
For example, if a SaaS product requires extensive human consulting services to execute the product launch based on best practice implementation methodologies, Workday will enable companies to calculate the exact cost of the consulting hours to trigger recognition of revenue for those consulting services when the milestone is reached.
As with both SAP and NetSuite, Workday requires extensive planning and project management, and its implementation will take several months, but it will produce a superior audit trail that will allow auditors to trace every dollar of recognized revenues back to the original customer signature and the person who performed the work.
11. QuickBooks
QuickBooks provides an entry-level solution to managing subscription revenue for early-stage startups. On the surface, QuickBooks provides the foundation for accounting for revenue using manual journal entries and deferred revenue schedules.
It is important to note that QuickBooks relies heavily on external add-on products and services to manage the complex environment in which most startups operate today.
For instance, if an early-stage startup sells a $100-per-month software license, QuickBooks does an excellent job of managing cash flow and basic reporting. However, once you begin implementing a multi-element or usage billing contract or making mid-term upgrades, you will quickly find that QuickBooks no longer functions well, and in turn, your finance teams will be forced to rely on massive Excel spreadsheets to manage allocations associated with these types of contracts. Eventually, your finance teams will find themselves with so many potential errors in their manual processes that their financial close cycle will increase from a few days to an ordered cycle of 15 days.
Checking If Your System Is Safe for Audits
Finally, dedicated SaaS revenue recognition software will not be considered reliable unless the auditors can verify the integrity of the data produced by the solution.
When evaluating the suitability of automated revenue systems, prospective customers should focus less on the marketing messages of the companies and more on the systems' ability to process retroactive contract downgrade entries without the need for any manual journal entry adjustments.
