Moving beyond straight-line revenue recognition
Whether you need to recognize revenue when billing events occur, or even as your service is consumed in real-time, learn why you might want to choose other methods that go beyond straight-line revenue recognition.
Topics covered in this webinar
- Straight-line prorated (a classic)
- Nuances with straight-line
- Usage-based and services
- ASC 606 and percentage of completion
- Systems to address complexities
About the presenter(s)
Eren Koont, Platform growth, Ordway.
Read the transcript of the webinar archive
Eren Koont, Ordway [00:00:00] I think we've got critical mass when we go ahead and get started a little after 1:00 p.m. here on the East Coast of the United States.
Eren Koont, Ordway [00:00:08] We've got a coast to coast webinar today with with Brannon coming in from the San Francisco area. Thank you for joining us today to talk a little bit more about revenue recognition rules and how companies are moving beyond straight-line revenue recognition. So let's go ahead and dive in.
Eren Koont, Ordway [00:00:31] Just to set the agenda here a little bit. We're going to go through Straight-line Prorated, the classic of classics. We'll talk through some of the nuances around straight-line revenue recognition, and then start thinking about how revenue recognition is changing with new evolving business models with the way that SaaS and other business models are evolving. Revenue recognition change, revenue recognition rules and treatments are also changing. And what we'll do here is have some Q&A and polling throughout the webinar to make it a little bit more interactive.
Eren Koont, Ordway [00:01:11] But if you want to add questions to your Q&A through the Q&A tool in the Zoom bar that you have on your screen, we will save those up for the end of the webinar. And then Brannon and I will we'll go ahead and answer those. So just a little bit about who we are at Ordway. Just to give context as to why we're talking about this today. Billing is really in our DNA and we're a company that is helping companies around the world transform their sales to finance operations and so serving businesses of all types of sizes and business models and industries and founded by a team that has deep experience in the ERP financial enterprise software space and with the folks that have that are building the platform.
[00:02:05] And the software here at Ordway have had stints at Workday, Zuora, Intacct and more and really excited to be co- presenting today. Brannon Adlesh, our product manager of the finance portion of our platform, and just a little background for him. He's been in the finance executive for the last decade or so and has had since early on at places like Zendesk, Coupa and Negotiatus. So.
Eren Koont, Ordway [00:02:37] With that, I will turn it over to Brannon and let him take it away.
Brannon Adlesh, Product, Finance, Ordway [00:02:44] Yeah, and thank you for the introduction, Eren. And thank you, everyone out there for join in. Yeah. No, Eren, I had a good time. You know, I'm putting this presentation together. You know, chatting about, you know, some of my past experiences and, you know, some of the challenges that I've run into professionally with, you know, revenue recognition in managing contract life cycles and, you know, at its core revenue record record, at its root revenue recognition seems pretty straightforward. Right. You know, you take a you know, an annual contract, for instance, you know, twelve dollars a year. And you just divided by. Well, you know, that's you know, what many who, you know, don't work in the corporate finance industry or in those visit professionally. Think of it as well. You know, it's it's it's pretty it's it's pretty straightforward.
Brannon Adlesh, Product, Finance, Ordway [00:03:36] But as we know, as finance professionals, it's really not that simple. There's a number of complexities are layered in in terms of, industry standards with ASC 606. And, you know, managing 50 contracts is pretty straightforward. But but taking those contracts, 50 to fifteen hundred, the level of complexity grows. And as we continue to salespeople can be pretty creative. And as you're looking for new business opportunities, you may introduce new products and services into the form. And you need to, manage sometimes contracts and recognize revenue differently across those different services that you provide your customers. If you want to move to next slide, please. Yeah. So, you know, the you know, one of the key items that we wanted to address today was this. You know, the classic straight line revenue recognition. Well, you know, It serves, you know, many use cases, especially in the SaaS and subscription industry. But it's even with its simplicity, it's difficult to scale. And it's tough to, take, a spreadsheet and manage that. You're it's it's time-Consuming. You're looking at, you know, hours and hours on your close process of making sure things are are accurate. And it's just difficult to scale this up. Right. And coming back to kind of the core idea of, you know, dividing something by 12 annual contract or whatever that might be, it seems simple.
Brannon Adlesh, Product, Finance, Ordway [00:05:24] But as you know, your business scales and you continue to introduce new products and services, You may not need or use that classic straight line revenue recognition. Right. You know, when we start to introduce, things like professional services into your contracts, ongoing support, adding new products into the subscription or up sells. What does that look like? How do you how do you maintain and manage that and react to your changing business needs throughout your business and sometimes finance is a little bit of an afterthought, especially as you're looking to grow and scale your business. Because, you know, like I mentioned earlier, salespeople can be creative and sales are always looking for new ways. And product teams as well are looking for new ways to grow into new territories. And oftentimes, you know, finance, they get the short end of the stick a little bit because they have to manage all of the complexities of reporting.
Brannon Adlesh, Product, Finance, Ordway [00:06:18] And. It's it's difficult to scale that stuff in.
Eren Koont, Ordway [00:06:25] Yeah, I think, speaking of scaling. And to do a little polling and a little interaction, so on your screen, you'll see a poll and it will be how many contracted deferred revenue. Are you managing today? So just give people about 20 seconds to answer this. In Brannon, while people are voting, when you were managing out of spreadsheets, how many contracts were you? Were you attempting to attempting to manage?
Brannon Adlesh, Product, Finance, Ordway [00:07:03] You know, it went from anywhere from 50 to, like I mentioned earlier, you know, fifteen hundred. And doing it manually and spreadsheets like it, like I mentioned, again, it's just extremely time consuming. And it's it's not great for the psyche as well. I mean, you're constantly checking to make sure that things are accurate and you make sure that you especially with mid-period or midmonth, you know, start dates and end dates, making sure that you're properly accounted for. You know, the revenue within those those periods is, you know.
Brannon Adlesh, Product, Finance, Ordway [00:07:39] I have nightmares, you know, thinking about the fast, close prices that, you know, that I assisted with and helped with, you know, the the team effort that it really takes to pull those numbers together is definitely a team effort.
Eren Koont, Ordway [00:07:54] And just to share results with the audience, most of you, over 75 percent of you are managing more than one hundred and fifty contracts. So probably lots of sleepless weekends and nights there. So. And the other 25 percent were split evenly between less than 50 and between 50 and 50. So. We've not let it slide.
Brannon Adlesh, Product, Finance, Ordway [00:08:20] Yeah, and no. And that's a perfect transition, just talking about, you know. What do you do with partial months? How do you how do you account for that? How do you manage that?
Brannon Adlesh, Product, Finance, Ordway [00:08:30] You know, not every contractor or service period starts, you know, at the beginning of the month and you begin delivering service to your customers. On the fifth, the 15th, the 21st, you know, properly accounting for that and making sure that it matches up with the billing and that you're recognizing the right amounts you over recognizing are unrecognized. Any given period is challenging. And you know, the adjustments that you sometimes have to make down the road to account for mishaps in earlier periods is common. You know, you're going back and making adjustments to your revenue schedules, making adjustments to, you know, you realize gains and losses based on, you know, prior mishaps where you over or under recognized is, again, you know, charging. You know, while it is a straight line method, you know, I knew I shouldn't say new. But in the last fifteen years, the introduction of exact dates, right. Revenue recognition with continuous service delivery makes things, you know, managed. Then the spreadsheet, again, is going to be very challenging, especially with, you know, things like leap year or understanding of, you know, up sales and contracts and pro rating. Those contracts based on, you know, your existing contract management is challenging again, but it's more reflective of how you're actually delivering the service to the customer. If you have a business model where the customer is know, you know, you don't see much change much of a month in terms of the service that you're delivering, you need to be able to ratably recognize that throughout that, you know, the 365 days contract. And again, coming back up, sales and changes in contracts. Being able to properly account for that is something you have to have a you know, you Excel wizards and spreadsheet wizards to really make sure that your numbers are accurate, that you don't need to continuously splotched things in that frame.
Eren Koont, Ordway [00:10:37] This might be showing my age here, but wasn't Spreadsheet Wizard one of The Who's greatest hits? Was that spreadsheet wizard or Pinball Wizard?
Eren Koont, Ordway [00:10:48] I can show my great hair. Hopefully, some of you out there got that. Moving on to the next. And this is where it gets interesting. We sort of covered the straight line series. But Brannon.
Brannon Adlesh, Product, Finance, Ordway [00:11:00] Yeah. You know, as businesses have evolved, you know, I think 10, 10 years ago it was that classic SaaS annual subscriptions. But as business models have evolved, we've begun to see. No, never. A number of businesses transition to usage based subscription models and consumption models. Know whether that be, you know, data consumption or, you know, agents or whatever you're really selling to your customers. You have to, you know, sometimes manage those contracts with a traditional platform fee, maybe professional services. But then also there's this usually based consumption model and, you know, managing monthly minimums and tracking that. You said you had so many inputs that are going into your revenue recognition model that, again, you know, it's managing multiple types of revenue recognition within one. Is it is something that no, we see the evolution of moving towards systems because managing that in a spreadsheet. Right.
Brannon Adlesh, Product, Finance, Ordway [00:12:00] Is is something that, you know, it is takes hours and hours upon your close process. And and revenue is typically something you want to kick off your clothes. And so if you haven't nailed down your revenue numbers at the beginning of a month, you're just going to delay the overall closed process and be able to look back and bill in arrears and but also recognize, you know, there's we've we've seen a lot of businesses, especially our our our own users and customers, adopt this usage based model.
Eren Koont, Ordway [00:12:31] And with that, I'm going to launch another poll here. And this is related to how many products with how many. Do you have products with different revenue recognition rules? Please go ahead and answer that question now.
Eren Koont, Ordway [00:12:52] Let people answer here. And.
Eren Koont, Ordway [00:12:56] Brandon, how in your past and even today? How are most companies having products with different rules or is it is it they pick one method and go with it?
Brannon Adlesh, Product, Finance, Ordway [00:13:08] No. It's definitely especially with the introduction of ASC 606. You have to treat different services and you performance obligations are going to have different revenue recognition rules and be able to bundle those together and sell them as one to your customer.
Brannon Adlesh, Product, Finance, Ordway [00:13:24] You know, there may be three or four different revenue recognition methods that you need to use to properly account for for those packages that you're selling, whether it be transactional revenue, usage based revenue, professional services. There's a number of different, you know, car revenue carve outs. There's so many different variables that you have to consider when selling. And again, back to, you know, salespeople can be creative. They want to be able to have they want the opportunity to sell a number of different ways to bring a new business and be able to account for that. It's something that, you know, accounting report on that is something that's very important.
Brannon Adlesh, Product, Finance, Ordway [00:14:05] And just to share the results of the poll, 100 percent of you out there said that, yes, You're using multiple rules.
Brannon Adlesh, Product, Finance, Ordway [00:14:17] Yeah, I mean, that is, you know, a perfect side which can transition to the kind of continue the conversation around, you know, you know, layering in, you know, these usage based models. You know, services, revenue, car about. It's you know, it's it's becoming increasingly challenging and important for businesses to be able to bundle these packages and subscriptions together, sell them as one package. But then, you know, report, you know, whether it be a percentage base, you know, completion or recognizing immediately upon usage for a given month or given quarter. Been able to make estimates on prepaid usage and understanding what that looks like is is, you know, it's moved we've moved beyond that.
Brannon Adlesh, Product, Finance, Ordway [00:15:08] The classic platform fee. Really? Right. It's more so there's a platform theme which may be straight line usage base, which is going to be recognized immediately upon consumption in a given month. You know, additional services, professional services that are learned. And if those performance obligations are tied together, it can be it can be a headache.
Brannon Adlesh, Product, Finance, Ordway [00:15:29] Right.
Brannon Adlesh, Product, Finance, Ordway [00:15:39] Yeah, I think, you know, a few of the bullet points on this slide here and I've, you know, hinted at it is, you know, the ASC 606 compliance that, you know, as finance professionals, we've all had to transition to even, you know, private companies. All public companies have now made that transition. But private companies are in the process of doing that as well.
Brannon Adlesh, Product, Finance, Ordway [00:16:00] And you may think you have nailed down a good way of managing your contracts and you've done everything the right way. And then all of a sudden your auditors step in for one of your first few audits. And you have to take a look back at all of your historic records and revalue and, you know, basically go through all year certain contracts and revalue them to make sure that they're compliant. And again, doing this in a spreadsheet is something that gives you, you know, not a ton of confidence. Does it give you your auditors and kind of confidence to be able to break out the different services within a bundle package is paramount to accurately reporting, you know, your monthly, quarterly and annual financials.
Eren Koont, Ordway [00:16:47] And just for context here, this is what we're doing here at Ordway for our own running, our own business. And I think this leads into the last poll of the webinar, and that is how close.
Eren Koont, Ordway [00:17:03] Are you to ASC 606 compliance and answers that we're finished more than halfway there beginning our journey and what they see at a ASC 606? I'm so deep into it that I can't even pronounce it. Well, there's definitely going to give people another 10 seconds to finish this up.
Eren Koont, Ordway [00:17:34] Five, four, three, two, one. Definitely a bifurcation in that data. It was either your you're done or what the heck is that ASC 606?. Well, I certainly would love to help out on either ends of the spectrum. And let's see if we can help out, but move into the systems. And really, Brannon, if you can just talk through sort of how companies should be thinking about systems and and how from a finance perspective, this will really help understand that.
Brannon Adlesh, Product, Finance, Ordway [00:18:10] You know, I think maybe a little story time here. But, you know, I was first actually introduced Ordway when I was evaluating different applications in the market that could help me move from spreadsheets into, you know, an application where I can or a system that can manage a growing number of contracts.
Brannon Adlesh, Product, Finance, Ordway [00:18:31] And it's it's you know, I saw the value as a finance professional and in today, working with our customers and prospective customers, it just goes to show. It's difficult to manage changes in spreadsheets.
Brannon Adlesh, Product, Finance, Ordway [00:18:48] It's difficult to have a deep understanding of your contracts and spreadsheets systems, you know, provide a number of benefits. But for me, it was most importantly, it was just the you know, that one source of truth where I had you know, I can go to, you know, an application. Understand?
Brannon Adlesh, Product, Finance, Ordway [00:19:08] You know what? What contract. You know, what a contract looks like today. If we add new, you know, a new product or service, I can evaluate that within the system. I can add it in tightening things up. Right. It's it's it's one of those areas where you don't you feel like you have fewer loose ends in the system.
Brannon Adlesh, Product, Finance, Ordway [00:19:26] You can understand. You can you can update assumptions. You can change things and have that, you know, updated across your you know, your contract base.
Brannon Adlesh, Product, Finance, Ordway [00:19:36] You can understand, you know, when a performance of, you know, obligations met, whether it be, you know, for instance, professional services and able to go in to see, know, view all of your professional services, contracts and services and be able to look at them in high level and understand, you know, what did we recognize this month versus what's, you know, still deferred in terms of our professional services revenue, being able to have that, you know, through view and click through, you know, a number and get to the contract and really understand not having to manage your PDFs in, a Google folder and a separate spreadsheet that you're looking at, you're going back and forth. You have everything pulled together is a massive benefit and timesaver.
Eren Koont, Ordway [00:20:20] Great. Well, I think where that wraps up the end of the program. But I would love to open it up to Q&A. Just a reminder, we have three more webinars in the webinar series about removing inefficiency in the sales to find its workflow. Coming up in a couple of weeks, that's actually July 2nd. Not July 3rd here in the US. That's actually a federal holiday on July 3rd. We moved it back a day. And some invoice design template, best practices and then getting into the really exciting topic of what the heck's a webhook? And how will that transform your. But with that definite like to see whatever questions the audience has. Thank you, Brannon, for for walking us through that. That great content. Looks like we got a couple so far. Let's see. Do you ever see all three straight line immediate and percent completion used at the same time?
Brannon Adlesh, Product, Finance, Ordway [00:21:23] Yeah, I mean, we we we we see that all the time, you know, in initial invoice would say it's, you know, four. Fifteen thousand dollars. No. Ten thousand dollars of that are, you know, your platform fee.
Brannon Adlesh, Product, Finance, Ordway [00:21:36] Know the additional portion is professional services. And within the same contract you have that, you know, usage based and professional service performance obligation to meet that, you know, it's gonna be in phases, you know, month one, you've completed 50 percent of the project and you've recognized just that one twelfth of your platform fee. But you have been able to change that. And just it's really challenging. And again, and spreadsheets, because you don't know what component that you you have there. And we see it all the time.
Brannon Adlesh, Product, Finance, Ordway [00:22:07] A number of our customers have that exact, you know, package or bundle that that that was the address there.
Eren Koont, Ordway [00:22:17] Thank you for that. Looks like we have another question here. I related to you talking about managing the fifteen hundred contracts out of the one spreadsheet. Was that just you doing that or was that a team of people?
Brannon Adlesh, Product, Finance, Ordway [00:22:31] Now it's 100 percent a team effort, you know, and being able to make updates and make sure that your time stamping those updates and understanding what's changing as new contracts to me and, you know, updating the workbooks with that, it was more, you know, not just one person is, you know, three, four, sometimes even more than that that we're reviewing now, not just, you know, entering data and updating the data and making sure that everything is accurate, but also being able to have, you know, people come in and check that data, make sure it's accurate in month over month changes and looking backward. You previously had your work with last close versus disclosed understanding.
Brannon Adlesh, Product, Finance, Ordway [00:23:12] You know, what's fallen off or what is to be added in multiple cycles are spent managing that number of contracts.
Eren Koont, Ordway [00:23:23] It looks like that is the last question for the webinar. Definitely. Appreciate everybody attending today. And we will send you a recording tomorrow. Once we've processed it and put it on the Web.
Eren Koont, Ordway [00:23:36] But really, thank you, Brannon for sharing your expertize with the community. And please sign up for the next one. That's happening July 2nd, not July 3rd. And we'll see you then. Thanks again.