SaaS Revenue Recognition Challenges
SaaS Revenue Recognition Challenges with QuickBooks (& What You Can Do About Them)
The relationship status of SaaS revenue recognition and Quickbooks accounting software? It’s complicated.
Revenue recognition on its own is incredibly complex, due in part to stringent rules and guidelines established by standards boards and regulatory agencies. Things only get more complicated from there — especially if your business bundles services or support with your subscriptions, agrees to early termination clauses, or commits to delivery of any non-standard functions/capabilities. And if you’re using Quickbooks on top of it all? Let’s just say you’re bound to face a few challenges when it comes to GAAP-compliant revenue recognition and deferred revenue management.
The good news is that, as a SaaS business, you’re not alone. Many companies start out using QuickBooks before outgrowing the software. If this sounds all too familiar, we’ve outlined the key SaaS revenue recognition challenges that can arise — and what you can do to un-complicate your own relationship status with rev rec.
Challenges of Managing SaaS Revenue Recognition in QuickBooks
From delayed or inconsistent revenue recognition scenarios to data entry errors, we’ve outlined the top three challenges to keep an eye out for:
- Quickbooks is designed for cash accounting as opposed to accrual accounting.
QuickBooks is an invoice-based system, which means that revenue is only recognized once an invoice is paid. For example, if an invoice is sent in January for a three-month subscription, QuickBooks will recognize all the revenue in January as there’s no way for the system to spread it out over the three-month period.
This means you’re recognizing revenue either too early or too late. If you’re recognizing revenue too early, that’s a big risk that could result in an overstatement of revenue.
- Recording revenue manually is time-consuming and prone to human error.
If you’re already aware of the risk highlighted above, then chances are you have mapped your items to a liability account so your revenue doesn’t post to the income statement right away. This also means you are tracking your revenue in a spreadsheet. That means, every time you send an invoice in Quickbooks, you copy that invoice and its line items into a spreadsheet complete with your start date, your end date, and the amount. From there, you need to figure out how much you need to recognize each month. This happens each and every time you send an invoice, which as you can imagine, can become an incredibly time-consuming process as your customer base grows.
Furthermore, let’s say you made a small mistake — you hit a wrong key, forgot to enter an invoice, or accidentally changed something. That one tiny error will throw off your entire system of record-keeping, and you’ll have to spend even more time correcting that mistake.
- You’re missing out on key SaaS metrics.
Quickbooks isn’t designed for subscription businesses, and therefore it doesn’t provide all of the essential SaaS metrics and analytics you need in order to manage, grow, and retain customers or integrate with your CRM. You’ll want the ability to capture and understand financial data like recognizable revenue, deferred revenue, and unbilled accrued revenue automatically — and QB alone won’t help you get there.
Unfortunately, these revenue recognition challenges can lead to a common pitfall you’ll want to avoid at all costs.
We talked about cash versus accrual accounting and the risk of recognizing revenue too early, and well, that’s a problem. Why? When you recognize that revenue before it hits, you run the risk of stating that your company is doing better than it actually is. This is not compliant with the accounting principles and regulations because it doesn’t accurately reflect your revenue position.
Down the road, there could be consequences as auditors and/or investors might take notice. If you’re going in for a round of due diligence and somebody finds an issue with your revenue number, it first and foremost calls into question the accuracy of your financials. The question going through the auditors’ or investors’ minds is this … “If they can’t report revenue accurately, then what else is wrong?” The consequences are high. The valuation of your business is going to be lower. Similarly, if you can’t pass a clean audit, it may negatively impact your ability to get funding to fuel your company’s growth.
QuickBooks, ERPs, & You
An important thing to take into account if you’re considering breaking away spreadsheets is this: are you actually outgrowing QuickBooks, or are you just outgrowing QuickBooks’ financial reporting capabilities? These are two different things, and not everyone realizes it. QuickBooks is designed as a general ledger, not a platform for subscription billing and revenue recognition.
Due to the limitations of QuickBooks for revenue recognition, many B2B SaaS businesses will start looking at ERPs like Sage Intacct and NetSuite for their general ledgers. The price tag of an ERP is steep, but the move can make sense and be good for a mature SaaS company. We’ll cover that in an upcoming blog post.
The truth is you don’t have to make the big jump as soon as you think. And you don’t have to live in spreadsheets. We’re devoted to helping SaaS subscription businesses like yours break away from spreadsheets — without breaking the bank.
You get to keep QuickBooks along with your sanity. We get to go to work every day knowing we’re helping 400-plus B2B businesses grow from start-up to maturity with the subscription management and financial operations insights they need, VCs depend on and GAAP requires.
It’s a win-win-win scenario.
For help differentiating between when you’ve grown out of QBO and when you simply need help extending the life out of it, check out this article.
How to Solve Your SaaS Revenue Recognition Challenges
While Quickbooks is not equipped to fully manage your SaaS business needs, there are alternative subscription management platforms that automate, streamline, and optimize revenue recognition. Switching to a platform like SaaSOptics can alleviate the hassle and pain points of using complex spreadsheets. In addition, SaaSOptics can be connected to your general ledger in order to automate the majority of your revenue management processes.
When you make the switch from recognizing revenue in QuickBooks to SaaSOptics, you can:
- Capture complete revenue numbers automatically like recognizable revenue, deferred revenue, and unbilled accrued revenue.
- Expect GAAP-compliant revenue recognition that ensures accurate reporting and analytics.
- Close revenue at incredible speeds — approximately 75% faster than manual spreadsheets.
- Send automated messages to customers so you can follow up on things like unpaid invoices with the click of a button.
Revenue recognition is challenging enough in its own right, but by using a better-suited platform, you can make those challenges a whole lot easier to tackle.