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C-suite-Executives’ are always devising new ‘Business-Strategies’ to increase ‘Market-share’ to outplay their Competitors. At-times these initiatives lead to a take-over of a foreign Company, which in turn leads to complexities in terms of compliance with local & international GAAP (Revenue-recognition). In effect, revenue is predominantly considered to be a KPI – key-performance-indicator for many businesses. Whether you have been ‘Studying-accountancy’ or just started working in Finance (Accounts-receivable, Credit-Control); it is likely that you have come across terms like deferred-revenue, accrued-revenue, & bad-debts.
‘E-Commerce & Service Industries’ tends to be under immense scrutiny from the concerning regulatory bodies (CH/ SEC) as far as the compliance with revenue-recognition principles is concerned. Whether that be the adoption of IFRS 15 or compliance with US-GAAP. Given the dynamic nature of E-commerce & Tech industry, it is imperative that robust controls are put in place to manage revenue-recognition process in compliance with the local GAAP/IFRS.
In a service industry business model, revenue is earned by means of providing services e.g. Subscriptions, by earning Royalty, or by rendering Specialist-services.
As far as ‘subscription’ revenue is concerned ‘Netflix’ is a good example; whereby customers pay for the digital-content-service. This is where deferred-revenue comes into play.
Revenue-recognition for a one-off service may not be so complex to deal with e.g. an Engineer goes to fix a printing-machine & the service-provider Company then invoice the client accordingly. In this instance there is no deferred revenue as the service is already rendered & terms & conditions accepted by the customer.
The process of revenue-recognition can be broken-down as follows e.g. rendering of services, customer acceptance of terms & conditions (contract), probable payments (direct-debit), transfer of risks & ownership (delivery). As per IFRS 15 before recognising the revenue: the company must ensure that ‘Performance-obligations’ have been met.
Imagine buying an Amazon product called ‘Kindle’. Which allows you to read E-books at your leisure. In this case, the performance obligation would be the availability of the Kindle content to the end-customer, terms & conditions acceptance, & a payment confirmation (Direct debit/ PayPal).
Due to the dynamic nature of their business-model, the likes of Tech & E-commerce Companies are under pressure to deal with the requirements of revenue-recognition. This is due to the fragmented information that needs to be collated & assembled from multiple systems to prepare monthly KPI reports & accounts. This situation is aggravated if there is no CRM system in place & timely & reliable information is not available due to I.T glitches.
In order to ensure that the finance-teams are always ahead, when it comes to complying with the mechanics of revenue-recognition, there should be strict controls in place. In the tech-industry, managing the supply-chain of your customer-logistics is imperative & if you want to stand any chance of outplaying your competitors, then you must take CRM seriously.
Thanks to ‘Salesforce’ a CRM -customer-relationship-management system. By using a CRM system such as Salesforce, the companies can be rest-assured that their finance-teams will have access to key-customer-contract information in terms of Customer POs, key sales communication, potential returns & so on. Ultimately the finance-department will have 360 % visibility around revenue-recognition workflow. They would then be able to ensure that revenue recognition process is being run smoothly without having to encounter any bottlenecks in terms of delays, or data glitches.
In summary, investing in a reliable CRM System will be a viable investment. The costs associated with deploying such a system should be assessed & evaluated in line with the challenges faced by the finance teams. C-suite executive can assess whether the potential ROI by introducing such initiatives outweighs the compliance-challenges faced by the Finance-teams.