Every business owner should worry about being transparent with their finances.
Mishandling revenue can lead to compliance issues, financial misstatements, and missed growth opportunities. With accurate revenue recognition, businesses can keep financial integrity and understand how they can best strategize for their future.
This guide explores revenue recognition and its importance, and how to manage it properly with the help of remote accounting services like SkyFin.
What Is Revenue Recognition?
Recording income when it’s earned, not when a payment is received, is called revenue recognition. This principle ensures a business’s financial statements accurately reflect its performance, especially those running a subscription-based service.
For example, streaming services and SaaS companies record revenue when a subscription service is delivered, even if the customer pays earlier or later.
Businesses with proper revenue recognition processes adhere to set accounting standards, namely the International Financial Reporting Standards (IFRS), and Generally Accepted Accounting Principles (GAAP). These require businesses to recognize revenue systematically.
Revenue Recognition Challenges
Variable pricing models and multi-stage deliverables are only some of the reasons why growing businesses could have challenges with revenue recognition. Common issues include:
- Multi-element arrangements: Recognizing revenue for service or product bundles.
- Deferred revenue: Tracking income for services paid before they’re delivered.
- Compliance risks: Ensuring adherence to standards like IFRS 15 or ASC 606.
- System inefficiencies: Using outdated systems that can’t handle different recognition requirements.
An inability to address these challenges can lead to expensive errors, potential financial penalties, and a lack of trust from investors or stakeholders.
How to Approach Revenue Recognition
To effectively manage revenue recognition, you (or your accounting department) should familiarize yourself with relevant accounting standards and how they may impact your business model. You could do this with software designed for virtual revenue management, automating the process, though you should always have a human double-check!
You can also properly allocate revenue through segmented contracts, breaking them down into performance obligations. Lastly, you should perform regular audits to identify red flags and make sure your reports are accurate.
If any of this seems difficult or overwhelming, never hesitate to reach out to accounting professionals.
How Remote Accounting Services Can Help
Managing revenue recognition in-house can be overwhelming and expensive for growing businesses, especially without specialized expertise. Partnering with a remote accounting provider like Skylight Financial Solutions gives you access to professional accountants who understand your industry and who give you financial compliance support, giving you peace of mind that all your reports are accurate.
Plus, outsourcing work to remote accounting teams gives you access to a wealth of experience at a fraction of the cost of having a dedicated, full-time department.
If you’re looking for affordable guidance in addressing revenue recognition challenges, whether proactively or not, contact us today! The SkyFin team can help your business keep accurate financial records and remain compliant with industry standards without incurring hefty costs.
