Revenue Management: #10 Common Mistakes while Recognizing Revenue
We are at the end of the series on Revenue Management, covering how different businesses recognise revenue. Even with clear standards like ASC 606 and IFRS 15 in practice, businesses often struggle with the nuances of revenue recognition. Especially growing businesses that are so keen on scaling take a wrong foot.
Where do businesses often go wrong, and how can they avoid it?
Here are some of the common mistakes businesses make and suggestions for avoiding them before they cause us harm.
Recognizing Revenue Early
A common mistake is recording the full value of a contract or an invoice as recognized immediately upon payment, especially for services or subscriptions delivered over time. This inflates revenue in the short term and understates liabilities.
To avoid this, Businesses should ensure revenue is recognized only when performance obligations are met, not when billing or cash collection. This avoids overstating earnings in the short term and ensures compliance with ASC 606/IFRS 15. Deferred revenue schedules and automated recognition tools can help align recognition with delivery.
Ignoring Performance Obligation
Many companies fail to separate multiple deliverables in a contract, such as onboarding, training, support, or updates. This results in an improper allocation of revenue across the contract's life.
Contracts often include multiple deliverables, such as onboarding, training, or ongoing support. Each should be treated as a separate performance obligation, and revenue should be allocated based on its standalone selling price.
Overlooking Discounts
Revenue must be recognized based on the actual transaction price, not the list price. Failing to adjust the discounts, credits, or rewards provided will inflate the financial figures.
To overcome this, Revenue must be recorded at the true transaction price, not the list price. Discounts, reductions, credits, and incentives should be factored in from the start, and estimates for variable consideration should be reassessed periodically. This ensures reported revenue reflects the real value of the customer contracts.
Failing to Update Contract Amendments
Mid-term changes like upgrades, downgrades, or cancellations must be tracked properly. A reassessment must be performed based on the revised obligations and the revenue that remains deferred. Many companies fail to do this or skip this recalibration step.
Upgrades, downgrades, extensions, or cancellations require proper revenue reassessment. Businesses should clearly distinguish whether a change creates a new contract or modifies the existing one. Automated systems that recalculate deferred balances can simplify this process and ensure accurate reporting.
Manual Spreadsheets
Racking revenue manually through spreadsheets increases the risk of errors, especially when managing deferrals, returns, or variable billing models. Automating this process with tools like Zoho Billing ensures accurate, hassle-free recognition with audit-ready reporting.
Manual spreadsheets are prone to errors and limit scalability. Adopting automated revenue recognition software ensures accuracy and reduces compliance risk. Strong internal policies, approval workflows, and finance team training enhance accuracy and reliability.
Key Takeaway
With the right processes and tools, these challenges can be avoided. Businesses that invest in automation and adopt best practices early on will be better positioned to scale sustainably while maintaining compliance with recognition standards.
Zoho Billing is designed to simplify revenue management by automating recognition, tracking contract changes, handling deferred revenue schedules, and ensuring audit-ready compliance. It provides the accuracy, transparency and scalability needed for growing businesses to keep revenue recognition on the right foot.
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Dear customers, We're happy to bring you the September edition of our #CommunityDigest! Keep track of your subscription KPIs right from your smartphone: Last month, we enhanced our Android mobile app to help our customers get daily updates on their business health. We got to know from a lot of customers that this has made their job much more easier because they no longer have to keep a reminder to manually check on the previous day's revenue or activations. If you have not downloaded it yet, here'sCommunity Learning Series | Digest #4 - August 2020
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