So you offer a software subscription that costs $1200 per year. Your billing team suggests that you should bill customers the full $1200 before the start of a term. On the other hand, your finance team advices that the revenue needs to be recognized over the length of the whole subscription since you are technically offering a ‘service.’
No problem, you think, you can just recognize the revenue daily over the length of a year. Easy.
If your accounting periods are aligned by months, this is what your revenue schedule might look like:
Notice anything? In February, you are only recognizing $91 while other months vary between $98 and $102. That’s because the different numbers of days in each month will impact how much revenue is recognized during that accounting period.
For some companies, this isn’t an issue. However, B2C companies that have a high volume of subscriptions might be more concerned. Let’s assume your company has 1 million subscribers through 2014. In that case, you’ve recognized $91M in revenue for February 2014 and $102M in revenue for May 2014. Wow! A $11M increase in 3 months? Did you grow your subscriber base by 12%?! Now wouldn’t that be nice. These little differences can greatly impact your company’s projected earnings and skew your revenue trends.
On the other hand, you don’t want to change your subscriptions just because of revenue recognition limitations. In this case, what you need is a more flexible revenue recognition engine and the ability to recognize revenue evenly across accounting periods.
Zuora introduced the Monthly Over Time revenue recognition rule last month in anticipation of this scenario. Now businesses can easily recognize revenue monthly over the length of a subscription. Now, your revenue schedule might look something like:
The finance folks can finally keep up with your product and billing teams. To learn more about the revenue recognition module in Zuora, take a look at our knowledge center.