Revenue RecognitionApril 12, 2023

How Automating Revenue Recognition Works

Amanda Martinez Carrillo

Amanda Martinez Carrillo

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It may be hard to comprehend how automating revenue recognition is even possible. With its revenue policy intricacies and accounting technicalities, how can technology possibly automate the inputs from disparate sources and recognize revenue in compliance with ASC 606? Our short video explains how automating revenue recognition works so you can do more with less and recognize revenue with confidence.

Watch our video or read the transcript below:

Alissa: Hey Amanda, How does automation for revenue recognition work? Asking for a very frustrated accounting friend.

Amanda: I know that friend all too well!

As a revenue accountant, I spent most of my time reviewing sales contracts, looking for details about the contract terms, tracking deliverables for proof of completion, and reconciling data from multiple systems on spreadsheets. It was time consuming, challenging and exhausting; most days I felt more like a detective than a strategic analyst. Revenue accounting is a decision tree of possibilities, much like a maze – a confusing, intricate network of passages. The revenue accounting process begins with the execution of a sales contract and ends with posting revenue to the general ledger. But the path from A-Z requires time, strategy, courage, snacks, mad excel formulas, and fast keyboard shortcut skills!

Which begs the question –  if every revenue team has its own version of a cumulative spreadsheet that accounts for contract details, the status of deliverables, discounts to consider for allocations based on fair values, and intricate formulas to merge and reconcile data files for month-end close reporting – how is it possible to standardize and automate revenue recognition?

The answer: By automating the decision tree of possibilities! 

Revenue accounting automation was designed to pre-define rules based on policies and desired outcomes, which can be directly mapped to data from a sales contract, and systems that capture orders, fulfillment, and billings to form a revenue contract with accurate calculations and revenue forecast schedules over the contract term.

How does it work, you ask?

Just like a revenue analyst would review a contract for all of the critical components needed to define and account for revenue earned, rules can be configured with software to identify the same – (aka data mapping)

For example: Contract Number, Customer Name, Contract Term, Deliverables, SKUs, Quantity, Sell Price (discounts), Billing Terms, etc.

Instead of a spreadsheet, an automated revenue sub-ledger becomes the place that can incorporate formulas and rules to automatically aggregate data, calculate revenue and recognize it at a point-in-time and over-a-term based on predefined rules. Pre-configuring the rules for revenue automation is like building a map for revenue recognition. All possible outcomes for how and when to recognize revenue are documented and stored in the revenue automation software to manage the decision tree of possibilities and remove the manual checkpoints.

For example: when a sales contract contains products A, B, and C, the software can check each product discount against (pre-defined) fair value amounts,  determine if the sales discounts exceed the pre-defined range for each product and if so, perform revenue allocations across all eligible products and calculate the net revenue to be recognized. Mind-blowing, am I right?

Another example is when Product D is sold over a 3-year term and billed annually at the start of each year, the revenue software rules can calculate the monthly revenue amounts across all 3 years upon product activation, and separate the revenue action from the billing action. No matter how complex the sales contract is, the revenue policy can be automated and audited for success.

Here’s an example of how RightRev automates revenue rules with the validation of contract terms to recognize revenue. Mapping contract data from existing systems and pre-defining revenue rules will create a revenue contract with accurate calculations and journal entries to post to the General Ledger. Removing manual checkpoints increases visibility and allows you to manage real-time revenue reporting.

Revenue accounting without standardized automation is managed by a reactive set of tasks that happen after all systems have captured sales, booking, billing, and fulfillment data. It is not sustainable or scalable, and if your friend is getting ready to hit that panic button, spreadsheets are maxing out, reconciliations for month-end-close are taking longer, and they are most likely getting burned out. This means their company is not in the best position to grow and handle more volume until they find a better way.

Automating the decision tree for revenue recognition is a proactive approach that can create seamless accounting paths from sales data to the general ledger and remove manual workarounds while significantly reducing the risk of getting lost in the maze of possibilities. For tips on how to get from current state to the ideal state – change something!

Now that you understand how it works, read about the Top 3 Reasons to Automate Revenue Accounting.

Request a demo to see all of our revenue recognition capabilities.

Follow RightRev on LinkedIn to see more rev rec insights.

About the Author

Amanda is RightRev’s Sr. Director of Solutions Consulting and Technology Evangelist. She has 20+ years of substantial Financial, Technical, and Operations Expertise. She is a Subject Matter Expert in Quote-to-Cash + Revenue, Accounting, and Digital Solutions.

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