For SaaS CFOs, there’s few issues more irritating than a non-compliance fine. For one thing, they’re fully preventable. But just as importantly, they gnaw away at your available resources for growth initiatives, sales campaigns, and other strategic activities.
In this blog, we’ll examine 1) Why regulatory compliance is so important in SaaS finance, 2) Key challenges SaaS CFOs encounter in maintaining compliance, 3) Strategies for keeping your compliance unbroken, and 4) A few additional regulatory considerations that SaaS business leaders need to be mindful of. Let’s get going.
Regulatory compliance in SaaS finance: some context
In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) created ASC 606 and IFRS 15. These regulations offer guidance on recognizing recurring revenue from customer contracts.
Regulatory compliance is crucial for SaaS companies’ revenue streams, making it an absolute must for finance leaders. Detailed visibility into your deferred revenue waterfalls is part and parcel of SaaS profitability.
If you recognize revenue in a manner that’s inconsistent with the 5-step process laid out in ASC 606, you will not be able to officially report it. Doing so is illegal–you can’t claim unearned revenue.
You might wonder what all this regulatory fuss is about. But imagine a wild-west SaaS industry with no regulations. Now picture two SaaS competitors, Company A and Company B.
With no external standards, Company A might book $10,000 worth of annual subscription revenue in December and immediately recognize the lump sum.
Meanwhile, Company B might intuitively realize that they’re not immediately providing the total value of their contracted services. So they might opt to recognize revenue as they fulfill the attached obligations.
In our scenario, Company A looks like it generated much more revenue than Company B, making it a safer bet for investors. A lack of regulation sets the stage for an unfair playing field among organizations and robs investors of financial transparency.
In addition to revenue recognition standards, other compliance issues are at stake for SaaS companies–cyber security, data protection, and more. We’ll touch on those as well, but the focus of this article will be SaaS revenue recognition compliance.
The 5 steps of SaaS revenue recognition
Adhering to ASC 606 provides certainty in revenue recognition, enabling SaaS CFOs to maintain compliant financial reporting practices.
Saas finance leaders are required to follow a standardized 5-step process for recognizing revenue from customer contracts.
The steps are:
- Identify all contracts you have in place with a customer.
- Itemize the specific services you’re obligated to deliver.
- Note the precise transaction price for each of these itemized services.
- Provide the services spelled out in your contract.
- Recognize revenue as its performance obligations are satisfied.
What happens if your department is found to be in non-compliance with this process?
The negative impacts of ASC 606 non-compliance
When it comes to properly recognizing SaaS revenue, there are three main consequences you need to worry about.
- Non-compliance fines: SaaS organizations found to be non-compliant with ASC 606 can face significant financial penalties that eat into their cash flow.
- Revenue leakage: As we mentioned previously, you can’t legally report revenue in a manner that falls outside the scope of ASC 606.
- Reputational damage: If word gets out that you’ve had a compliance slip-up, potential users and investors alike will hesitate to align themselves with your organization.
Now that you know more about revenue recognition in SaaS finance, let’s review some common compliance challenges CFOs face.
Challenges in achieving regulatory compliance in SaaS finance
SaaS finance leaders grapple with a range of problems when seeking to maintain revenue recognition compliance. Knowing the main hurdles you can expect when recognizing revenue can help optimize the process.
What issues might you run into when recognizing revenue in your department?
Maintaining compliance as you scale
For growing SaaS companies, ASC 606 requires highly specific workflows to be replicated at scale. That’s a daunting prospect and presents the possibility of large volumes of revenue leakage from manual errors.
Cloud financial management allows SaaS CFOs to seamlessly scale revenue recognition for uninterrupted compliance.
Adapting to changing regulations
Compliance standards for revenue recognition and other regulated business areas aren’t static. They typically undergo updates as regulators become aware of further changes that need to be made.
Automated accounting software provides immediate alerts on any regulatory changes that impact your company.
This keeps you ahead of regulatory amendments instead of scrambling to adjust to them.
Dealing with data silos
In a siloed SaaS company where every team updates its own data, revenue recognition is an especially perilous process. Data silos are known to contribute significantly to revenue leakage.
Even seemingly small leaks can add up to troubling sums if left unaddressed.
SaaS finance leaders can eliminate data silos and streamline revenue recognition with an automated single source of truth.
Clearly, there’s a lot at stake in SaaS revenue recognition. How can you optimize compliance and plug revenue leaks permanently?
Strategies for ensuring SaaS regulatory compliance
SaaS CFOs need to leverage some best practices in order to consistently satisfy revenue recognition standards and other regulations.
By following the strategies discussed below, you can pave the way to practically effortless compliance at your company.
Regular compliance audits
Running regular audits is one of the most effective ways to avoid compliance gaps. Otherwise, problems could go unnoticed for lengthy periods, resulting in large volumes of revenue leakage.
When it comes to audits, “better safe than sorry” is a great rule of thumb. Automated compliance tools streamline auditing, saving companies time, cash, and hassle.
Standardize your policies and procedures
The five steps of ASC 606 provide a clear and practical framework for revenue recognition. But they still involve getting many moving pieces to work in tandem–performance obligations, pricing itemizations, deferred revenue accounting, and more.
By providing your team with concrete standards and procedures, you’ll be much less likely to experience mishaps. Thinking of ASC 606 as just a 5-step process is missing the mark. It’s a 5-step process you need to continuously apply across dozens, hundreds, or thousands of customer relationships.
The need for process standardization becomes strikingly clear when you view it in that light.
Leveraging automation to slash manual errors
Automation tools are crucial in simplifying revenue recognition and improving financial reporting accuracy for SaaS CFOs. Cloud accounting software centralizes revenue recognition and uses AI to outperform human employees with respect to both speed and accuracy.
Non-compliance fines and revenue leakage can rapidly add up over a fiscal year. Automating revenue recognition eliminates manual errors, cuts your risk of fines and leaked revenue, and boosts cash flow by reducing non-compliance fines.
Let’s look at the benefits of automating this crucial accounting workflow.
Revenue recognition automation: what’s in it for you?
Cloud-based revenue recognition holds many advantages over legacy methods. If your tech stack can’t handle the rigors of ASC 606 compliance as you scale, any growth you experience likely won’t last.
You’ll end up losing ground due to fines, unreportable revenue, or the sheer logistical complexity of applying ASC 606 to hundreds or thousands of contracts.
What can SaaS CFOs expect to gain by trading in legacy tools for a more modern approach?
A permanent end to revenue leakage
Revenue leakage is sneaky. It’s easy for finance leaders to say, “This seems like such a tiny leak, and it’s simply not worth going through a tech stack update over.” But small leaks are symptomatic of larger problems.
Plus, the effects of revenue leakage quickly compound over the fiscal year and across the years. Automation allows SaaS finance leaders to plug leaks and maximize control over their cash flow permanently.
More strategic bandwidth for you and your team
Maintaining compliance manually is a constant uphill battle, and concerns about slip-ups can drain your team’s mental bandwidth.
Automating compliance alleviates this mental burden, allowing you to rearrange your priorities. With an automated SSOT, you can focus on strategic decision-making, business innovation, and growth initiatives.
Significantly reduced compliance costs
Manual compliance costs add up rapidly and come in multiple forms. Among the compliance problems that contribute to negative cash flow are:
- Fines and revenue leakage, as we’ve discussed.
- The “stolen productivity” factor. This encompasses all the valuable work you’re not doing while worrying about compliance.
- Manual compliance auditing that’s often time-consuming and costly
You can eliminate all these costs and more by using AI for your company’s revenue recognition needs.
Embrace automation for uninterrupted compliance
Regulatory compliance in SaaS finance is serious business. Deviating from revenue recognition standards can carry severe consequences–lost revenue, potentially hefty fines, possible business downtime, and a loss of investor and customer confidence.
Automating regulatory compliance offers significant benefits in terms of risk management, cash flow visibility, and overall financial control. In the ultra-competitive SaaS industry, this gives finance leaders a valuable business advantage.
To learn more, check out our datasheet for SaaS CFOs: Sage Intacct Revenue Recognition (ASC 606 and IFRS 15).
Sage Intacct Revenue Recognition (ASC 606 and IFRS 15)
Download our datasheet to learn how to automate revenue recognition and comply with ASC 606 and IFRS 15 standards for subscription, recurring, and complex revenue, saving you hundreds of hours each month.
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