4 Automation Strategies to Support Revenue Recognition for PS Organizations

One of the features of using a Professional Services Automation (PSA) tool is the benefit of the software being able to incorporate multiple team functions. A comprehensive PSA tool can support not only the project management, budget tracking, time entry, and scheduling, or what may typically be considered non-recurring revenue types, but also generate revenue data based on recurring revenue such as licensing or fixed fee arrangements. Consider these strategies when revenue recognition needs are reviewed.

Generating Revenue Data

When recognizing revenue from your PSA, you first have to define how the revenue data, or transactions, will be generated. While each PSA may have different mechanisms for generating the revenue data, considerations must be made to how your organization recognizes revenue. Do you primarily engage in fixed fee or time and material contracts? What about milestone billing? How you bill will likely drive how you recognize revenue. Revenue can be recognized in several ways, depending on which option best fits your organization and accounting model. Examples include:

• As incurred [based on time entries]
• As billed [based on invoices]
• A recurring model for subscription-based services
• Fixed fee or deferred revenue
• ASC 606

Finding a PSA which supports your revenue recognition model is key, especially if you use a combination of the above and need flexibility and options. Not only should the PSA be able to support these models, how the PSA supports these should also be considered. How easy is it to adjust revenue recognition, when needed, based on services or deals sold? Don’t make the mistake of painting yourself into a corner with limited options.  

Forecasting Revenue

Generate revenue transactions based on actuals – check. What about projected revenue; can your PSA predict? Depending on the method you use to recognize revenue, it may be a simple straight-line forecast method, or perhaps it is more complex and is a variable number.  For example, it may be based on the varying dates and hours that users are scheduled to work on a project and, as such, estimate the revenue to be recognized for the upcoming months. One aspect of appropriately forecasting revenue is to have a good understanding of resource management and effective scheduling techniques. Your PSA should have a flexible and robust resource management option to support varying forecasted revenue needs and generate as accurate data as possible.

Revenue Reporting

Generating revenue data is one thing. Reporting on it is another. The key to any effective report is to determine what action will be taken from the data presented. When generating revenue, how must the data be segmented? Is there a need to roll up revenue by department, region, subsidiary, or cost center? Some organizations report on revenue per user. Once you have defined the base reporting needs, ensure that your PSA can support these methods. If your PSA can support these, does it also have the ability to tag revenue by all of these methods, not just one, to ensure that each group receives the necessary segmentation? Reporting on work in progress (WIP) may require flexibility due to differences in how this is specifically defined across organizations. For example, some organizations consider one side of the equation as actual invoiced amounts, whereas others focus on existing charges before invoicing. Ensure that your PSA supports the ability to customize how WIP is defined and allow this customization to be utilized in reporting.

Technology and Revenue

Perhaps your PSA doesn’t generate data to the level of detail which is required in your organization. With an increase in unique revenue recognition methods comes the need to incorporate things such as integration for a financial or accounting system. or other customizations. Just because a PSA supports revenue recognition does not mean that it should be one size fits all.  A benefit of integrations with a dedicated financial or accounting system is sharing PSA-generated revenue data with these systems. These dedicated tools are often able to robustly support complicated revenue recognition models and requirements, such as ASC 606 or bundling.

Revenue recognition can be complicated and is unique to each organization’s business model.  Often the benefits of a PSA are thought to be simplicity and turnkey. However, if revenue recognition will be an important component (and usually is) of your PSA requirements, be sure to consider how flexible the automation tool is to extend with your own customizations as well as the flexibility of integrating to your other core systems.  

If your PSA solution doesn’t meet your needs, contact Top Step to discuss how NetSuite OpenAir can meet your PSA revenue recognition needs.