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To keep revenue flowing during some challenging years, businesses have been forced to be inventive – and that has driven a renewed focus on how it figures in financial accounts.
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Spotlight turns to business revenue
29 April 2022
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13 minute read
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Revenue is an important indicator not only of the health of individual businesses, but also of the broader sector to which they belong.
Faced with once-in-a-generation challenges over the past couple of years, revenue has become more of an acute concern for businesses while broader sectoral and economy-wide trends have also been closely watched.
One regular financial monitor of Australian SMEs showed a “strong rebound” in the proportion of businesses predicting positive revenue growth through to the end of 2021.
However, the research also highlighted the “boom or bust” split in business fortunes in today’s environment. It revealed “the widest range of revenue forecasts” since the inception of the research in 2014, with a variance of +9.6 per cent to -15 per cent.
Australian government research has asked businesses of all sizes to estimate, based on knowledge of their revenue, how long they could sustain operations with cash in hand. While larger businesses were relatively well insulated, SMEs predicted they could stay afloat only for a few months at best, highlighting the importance of accessing and properly booking revenue in challenging conditions.
Incredibly, 10-15 per cent of businesses of all sizes surveyed claimed they did not know how long they could sustain operations. For those companies, a more optimal picture of revenue and finances is clearly needed.
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Thankfully, there are positive signs as 2022 progresses. The latest government numbers showed most Australian businesses were able to stabilise revenue in February 2022. Some even managed to bring more revenue in, which is a positive trend.
It also points to gains for businesses that got inventive in the way they reached and served customers, with that effort starting to convert into results.
Chasing improvements
In general, with the world becoming more digital, businesses are putting a lot more focus into their quote-to-cash processes.
The idea is to make sure that contracts are created, sent and returned in a timely manner; that revenue from the contracts is correctly represented in the business’ financial accounts and forward statements; and ultimately that the business gets paid.
A lot of effort is being invested into one part of this process: configure, price and quote, or CPQ. This typically means deploying software that automates the configuration of products and services, calculates pricing and creates a branded quote that provides precise configuration and appropriate pricing. It also includes the right level of detail to eliminate issues that can stall the sales process.
CPQ means quotes can be sent out in minutes, instead of hours or days.
But there’s also much of the quote-to-cash process still left to complete after a quote is issued.
Once a quote is approved and a contract is signed, an order is generated and the product or service has to then be delivered. Upon delivery, an invoice is generated, payment is received and revenue is recognised. These all require different software components (or a unified quote-to-cash platform) to function.
Revenue accounting’s time to shine
For our purposes, we’re going to concentrate specifically on the revenue piece of this end-to-end process.
We’ve already established that revenue is a watched metric by external analysts in the private sector and government, but there’s also considerable upside benefit for businesses themselves in optimising revenue accounting.
Many businesses have likely experimented with different product constructs, service combinations and pricing tactics. This is probably one reason why Australian businesses have been able to stabilise or start to grow revenue. But these newer constructs and tactics have behind-the-scenes impacts, particularly in the way revenue from them is to be recognised.
In principle, revenue accounting comes down to recognising revenue when realised and earned, not when cash is received. That’s easy enough if the business sells one-time products, but if sales involve bundled contracts, it can become more complicated.
Managing contracts with today’s customers means offering a combination of products and services with varying delivery schedules. Contracts are also open to discounts, changes and renegotiations. Tracking these factors manually can become a significant task and lead to errors when recognising revenue.
Wherever in the world a business is domiciled, it will have to meet certain financial requirements. For revenue from customer contracts, these are couched in terms of standards like ASC 606, IFRS 15 and – closer to home – AASB 15.
As these standards change and evolve, and the business environment and broader market conditions change as well, the best way to stay compliant is to automate the way that revenue is accounted for in financial systems.
This means automatically assigning financial transactions and executing revenue recognition in real-time, automatic allocation of revenue to specific general ledger accounts, and automatic specification of how and when revenue will be recognised.
Doing all of this makes it possible for businesses to run profitably regardless of industry, geography or strategic objective.
Carl Warwick is regional sales director, Asia Pacific and Japan, for BillingPlatform.
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