The Role of Revenue Management
Revenue is one of the most important KPIs for an organization. A revenue multiple may be used to value a company for an interested buyer, strategic partner, or investor. Strong annual revenue growth underpins company value, drives investments and new business generation, and may entice key new talent to join. Failure to accurately account for revenue could also result in serious issues that can damage a company’s brand and jeopardize the business. Yet, most companies still manage revenue and revenue recognition compliance with Excel, a custom ERP solution, or a hybrid of the two. It’s often highly manual and requires large teams who can take a couple of weeks or more to complete monthly revenue close activities. Revenue team attrition is typically 30% or higher which has a damaging impact on performance.
The revenue recognition standards, ASC 606 and IFRS 15, prompted many organizations to establish new policies and controls and helped drive the creation of data foundations rich with granular contract and revenue data. However, for many organizations these new
approaches and processes were shoehorned into legacy architectures or existing manual heavy solutions without attention to improving the revenue outcome or building new revenue insight that would strengthen the business. With several years of global mergers and acquisitions resulting in complex and poorly integrated systems environments and today’s rapidly evolving business models requiring a constant stream of new product and service offerings, companies need to take a holistic approach to compliance and revenue management. Between the pressure to bring disparate data points together for analyzing and generating actionable insights, the drive to increase revenue quality, and the ongoing evolution of revenue recognition interpretation and application, revenue has never been more complex or more important as a driver of corporate value.
Revenue accounting vs. revenue management:
All finance teams are familiar with the revenue recognition standards, ASC 606 and IFRS 15, which prompted many organizations to establish new policies and controls around revenue. But revenue recognition is just one part of the end-to-end revenue lifecycle, albeit an important one. Instead of taking a narrow, compliance only view, revenue management should span the entire business – from product go-to-market, to sales operations and revenue accounting and into operations. True revenue management goes beyond the accounting function to impact cross-functional teams throughout the organization. By leveraging the rich data foundation that came out of compliance efforts to take a more holistic approach to revenue management, companies are driving valuable business outcomes, reducing risk, enabling accurate forecasting and providing strategic foresight to support business growth. In some cases, revenue management has a direct role in increasing the market capitalization of the company. And by delivering end-to-end revenue management, the CFO is seen as a trusted advisor, able to identify trends and analyze data to drive desired outcomes and sustainable, profitable business growth.
With the right systems in place to capture and unlock rich new data, a CFO can assess the overall health and quality of a company’s revenue and quickly pinpoint areas that need action or improvement. A ‘revenue health score’ may look at areas like:
Analyzing contract and revenue data can reveal excessive dependence on a single revenue source, business model, industry sector, region or demographic. This can spur a calibration towards sustainable profitability, development of new products, or entry into new territories.
Analyzing the full costs associated with each sale or contract can reveal true product profitability and uncover region or team best practices, effectiveness of incentives like commission or discount, and the amount of funding tied to a particular revenue quality.
This is the ability to evaluate the financial impact of concessions made based on deal timing. This means analyzing how fast revenue flows to the books during the period (month or quarter) and how much is sensitive to actions taken during the last few days or hours of the month. For example, higher than normal levels of discounting may occur to get the deal closed. Or a key event, like training, may need to be delivered before this ‘pent up revenue’ can be reported. This can drastically impact profitability. Analyzing revenue loading can help determine the level of back-end risk to the period and which type of products or contracts exacerbate such risk. With this information, you can take action to reduce risk and increase certainty of profit.
Analyzing the pace at which specific revenue streams are recognized from sales order or contract signature to proof of delivery, to P&L can help identify and rectify revenue log jams like credit score, fulfilment or product delivery/service issues. Measuring your revenue pace basically reflects the speed at which your sales will translate to your income statement or P&L. The determination of what is a ‘good’ versus ‘bad’ revenue pace is determined by the organization’s revenue objective – whether that is achieving maximum revenue per day or customer stickiness with long duration revenue commitments.
Knowing how long revenue from contracts is sitting on the balance sheet before moving to the P&L, can alert an organization to take action and optimize balance sheet use and efficiency. For example, it may be that you can tweak your business model to run on less working capital and divert the savings in that area to product development and driving innovation for competitive advantage.
Revenue management throughout the contract lifecycle:
Revenue management should start as early as the go-to-market phase. By partnering with the product marketing and pricing teams, the revenue team can use historical contract and revenue data to advise on the best way to price and bundle a product or offer in a way that drives quality revenue and works with stated revenue recognition policies.
Revenue management solutions can automate the capture of contract details and obligations, giving the company a single view of contract data and revenue burn. This data can then add value to the sales, operations and renewals process.
Analysis may show, for example, that certain incentives or clauses in a sales contract slow down or speed up the pace of moving revenue to the P&L, allowing teams to make the necessary adjustments and getting that revenue on the books even faster. Or it may show that too much revenue is coming from a single product or region, posing a risk to the organization.
Making sure your revenue teams are equipped with the right analysis and working closely with your deal desk can also lead to better business outcomes. Revenue teams can use data to help guide and train the deal desk on how to align to the businesses’ overall revenue strategy and understand how one-off incentives or specific deal structures can impact the quality of revenue. Revenue management gives you a single consolidated view of discount incentives and their effectiveness.
Revenue accounting is at the core of revenue management. With a smart revenue solution, accounting across multiple methods and reporting standards is automated, allowing you to ‘walk’ between the varying GAAPs and statutory requirements both for actual results and, more importantly, for forecasts that may not align to reporting standards with such central rigor and automation. Automate revenue allocation across multiple performance obligations or generate real-time allocation for pricing analysis. Reduce revenue team turn-over by reducing the dull, repetitive spreadsheet work and allowing them to add value to the business.
An automated revenue management solution can ease the manual requirements of revenue recognition and lead to more consistent company policy application consistency and better transparency for auditors, investors and business leaders. However, taking a holistic revenue management approach to revenue recognition has business benefits that go beyond compliance. Take Standalone Selling Price, (SSP) which is required under the new standard.
Establishing fair value or product line SSP tends to be completed annually, or quarterly, in a traditional business. Taking a month to complete 33,000 lines in a matrix to find SSPs isn’t unusual in large companies. For most companies, pricing is based on industry benchmarks or some other estimate that can be proven in audit but isn’t great for accurate forecasting.
With a revenue management solution in place that delivers operational intelligence, SSPs come together across a global organization in one place. Accuracy is guaranteed because it is generated by monitoring what has gone through the system. The organization now has a centralized record of every discount applied by region, sales team, and so on and can analyze whether those discounts drove a positive or negative outcome. This the kind of information that differentiates and empowers the finance team within an organization.
Reconcile and close:
Taking a manual approach to reconciling and close activities can cost businesses significantly. Some organizations have disclosed spending hundreds of thousands a month and several weeks just to close the books.
With the right revenue management solution in place, revenue data and accounting are centralized and managed efficiently by finance, reducing the risk of manual errors that spreadsheets introduce. Increased automation makes it easier to manage exceptions, review and approve allocations, and review bookings and backlog.
Analyze and report:
Insights gained from this new deep dive into contracts will grow the internal audience for financial reporting. Pulling data into one central hub gives finance an opportunity to serve multiple areas of the business with valued data-driven insights.
Reports are more detailed, forecasting more accurate and balances more transparent. Some finance departments are exploring the concept of ‘Finance Data as a Service’ where finance-owned and certified data is made easily accessible to departments across the organization through rich analytic tools, custom dashboards, and standards-based interfaces.
Revenue Recognition Compliance Challenges
Changing revenue recognition interpretation:
The standard is specifically written to allow companies some flexibility regarding interpretation. As an organization changes and grows, they may choose to change the way they interpret the standard and a solution should allow this flexibility over the long term.
New business models:
Innovation is required to stay ahead of the competition and often this takes the form of new products and business models. Finance controlled revenue recognition solutions remove the need for day to day IT involvement, empowering finance to self-configure
rules and performance obligations and address issues in minutes.
A more detailed, centralized data foundation is one of the benefits of revenue recognition compliance. If a solution is still relying on manual workarounds like Excel to centralize and standardize data from source systems, it’s a missed opportunity for automation and
will hinder efforts to get maximum value from the data captured.
Complex contract arrangements:
Many organizations have complex arrangements with their customers that could result in varying accounting requirements by geography, customer type, sales channel or even individual customer. These specific terms can be captured in the language of the
contract arrangement but not held with any of the upstream systems - like CRM or order management - that are used to support the revenue process. This means these terms typically need to be manually identified and input into the revenue recognition process.
In addition, many contracts require modifications mid-term creating further accounting and revenue recognition complexities.
Recognizing the changing nature of finance:
Gaining all the benefits highlighted in this paper requires the recognition that the nature of the finance function is changing. There are two key trends to highlight – the first is increasing levels of automation. The second is hiring the finance teams of the future.
As finance moves towards automating the 70-80% of finance tasks that are repetitive, finance teams must be used in more transformative ways. Employees and organizations are increasingly realizing that automation is not about reducing the workforce but about getting the most value out of employees and creating an environment to retain and support them. In the KPMG survey cited above, over 78% of respondents said they believe that AI (Artificial Intelligence) will enable existing finance staff to take on more value-added and strategic roles. Revenue is an area that is prime for automation and if a sizable portion of revenue management activities are still manual, it will not be possible to free up the employee time necessary to make the most of analytics and data mining
activities and build relationships with other areas of the business.
Finance teams of the future:
Finance talent models are changing, with Deloitte finding, “a premium placed on data scientists, business analysts, and storytellers...with qualities including a strong customer service orientation, flexibility, and good collaboration skills—in addition to the technical capabilities needed for specific jobs.” This will be a significant shift for most organizations and require them to reskill existing staff and go outside their traditional hiring frameworks. The in-house and external talent organizations will be looking to retain and hire
will not want 80% of their working day devoted to manual, repetitive work, so equipping teams with a platform for automation will be important to build the finance teams needed for the future.
Benefits of revenue management:
Drive business outcomes: use revenue insights to identify necessary actions, increase the quality of the revenue and determine the shape of the company.
Unlock opportunities: uncover new opportunities such as cost structures for new products or highly profitable geographic markets.
Reduce risk: increase revenue quality, and provide accurate reporting with full transparency to the regulators and to the market.
Increase market capitalization: provide investor confidence, increase valuation and credit ratings, deliver accurate statements and forecasts to the market.
Operational efficiencies: accelerate speed of close, increase automation and reduce risk of error, redeploy staff to higher value-added tasks.
Strategic foresight: transform the finance function, enabling them to deliver strategic guidance across the enterprise rather than just governance, and act as a trusted advisor to the CEO by providing valuable, actionable business insight.
Taking an active approach to revenue management can help organizations surpass competitors and react with agility to market changes. Companies who implemented an automated revenue management solution as a part of their compliance efforts are reaping the rewards of increased automation and efficiency and better access to data for business insights.
Published By- APTITUDE SOFTWARE