The subscription business model has grown in popularity with providers of services or products because it establishes a regular, predictable income stream. This is particularly true for technology companies. However, the subscription model poses challenges, primarily in handling the accounting and billing for subscriptions. Our benchmark research on recurring revenue finds that only 29 percent of participants who have finance and accounting roles, and fewer than half overall, are satisfied with their subscription invoicing process. As for complaints about the process, most (79%) said it requires too much effort.
Simple subscriptions (such as for a magazine) are handled easily by any financial system. Today’s subscription business models, however, are complicated by billing methods such as usage-based charges, discounts, seasonal plans and adding or subtracting users during the period. Our research finds that a majority of companies use four or more billing methods. Accounting for these variations can be further complicated because the data specifying the details of the subscription may be kept in multiple systems.
Complexity notwithstanding, mistakes in invoicing have a cost. Overbilling customers diminishes their satisfaction while underbilling them creates margin leakage. To keep the billing details straight, accounting departments typically resort to creating massive, time-consuming spreadsheets.
There is a solution to the complexity problem: software that automates the billing process from contract to collection. This single system of record connects all the steps from sales (and its contracting and CRM software) through finance and accounting (and their ERP systems). Such a billing system automates the movement of data through each step to save time. Because users enter information just once, the data at every step of the process is also accurate, up-to-date, consistent and controlled. In our research 85 percent of companies using dedicated subscription billing software said they are satisfied with their system, compared to 50 percent of those that use spreadsheets.
Software that automates subscription billing resolves tensions that can arise between sales and marketing departments on one side and finance and accounting departments on the other. The former want to be able to offer promotions and contract structures that are responsive to customer and market requirements, but finance and accounting departments resist complexity because it creates unsustainable workloads in spreadsheet-based invoicing systems. A system that manages the subscription billing process from end to end, from contract to collection, eliminates the need for accountants to check and reconcile bills because invoices are created from the system that houses the sole version of the relevant data.
Revenue recognition accounting is another reason for companies that sell even moderately complex subscriptions to use dedicated software. Two entirely new sets of standards for revenue recognition (ASC 606 and IFRS 15) are about to go into effect. Under them, bookkeeping is more complicated, especially when a subscription contract contains multiple elements that may be recognized at different times. A well-designed system will automate the revenue recognition process and ensure its reliability. Keeping track of even slightly complex services in a spreadsheet is hard enough, but in the new world of revenue recognition the job of keeping track of and calculating the different revenue and cash strands becomes far more challenging. A dedicated billing system ensures that the accounting and billing are always consistent and enables individuals to drill down from revenue to billed and unbilled transactions to see the underlying details.
Not all subscription billing software is the same, so detailed scrutiny is appropriate. Configurability is an attribute important for buyers to consider in selecting such a system. One that offers a high degree of flexibility in defining the scope, wording, terms and conditions of a subscription contract will provide sales and marketing departments with flexibility in creating and negotiating offers and setting terms and conditions, which sales people should have within limits set by management. At the same time, because the system tightly manages the process from end to end and creates a reliable link to revenue recognition, it can provide greater control, greater accuracy and increased visibility to finance and accounting departments.
The subscription revenue model has been growing in popularity in recent years because it aligns well with market demands. It’s likely to grow even more because technology is making it possible for companies to establish ongoing, dependable revenue streams from customers. Subscription services and products for today’s market often are too hard to manage, particularly when using systems that aren’t designed to handle even slightly complicated billing models. If your company uses a subscription model in its business and your systems can’t handle the billing without creating a large workload for the accounting department or putting the brakes on your sales and marketing teams, it’s time to investigate alternatives.