By Glenn Saunders
Businesses are evolving and changing faster now than at any time in the past. While experiencing rapid growth and change, some private businesses falter under the weight of their own stature. A failure in financial reporting or compliance can quickly have a huge impact on corporate reputation and the company’s prospects for continued growth and profitability.
Accounting departments are typically tasked with maintaining the integrity of the organization’s financial reporting, whether it’s required by lenders or investors or it’s relied upon by management in strategic planning and decision making. So how can companies employ technology to help prevent failures within their organizations? What products, services or compliance will be necessary in the next 20 years to ensure that companies accurately report financial information?
The fact of the matter is that financial statement audits are going to be more challenging as the lines between products, services and sales are further blurred with blended models. The Financial Accounting Standards Board (FASB) has revised revenue recognition rules multiple times in the past 5-10 years, with effective dates of the new revenue standard being 2018 for calendar-year-end public companies and 2019 for private companies.
When companies respond to meet consumer or customer demand by changing or modifying their business model, they further complicate financial management and reporting. Service companies now sell products, and product companies sell services related to their product. For example, Best Buy will warranty items you purchase from them as you leave the store, and their Geek Squad creates a huge service line opportunity for the company.
Another example is Amazon, which offers subscription services to Amazon Web Services (data storage), Prime (premium subscription), Audible (audio books) and other subscription- type services in addition to its primary product- based delivery service. Amazon also has a very complicated billing and revenue model coupled with an extremely large customer base.
Companies are increasingly offering products and services bundled into a single delivery model. This overlap of business lines matters from an accounting perspective and can create confusion. How is it possible to recognize revenue when products and services are bundled together? Is revenue recognized when the product is delivered or the services performed? What if the product represents 90 percent of the value but is only usable when configured by experts who represent the remaining 10 percent?
As smaller businesses begin to blend products and services, they need to be aware of and deal with the potential impact on billing and ultimately on customer satisfaction. No customer wants to have multiple bills from the same vendor for services provided. It is a nuisance for consumers, and something that businesses must consider as it relates to customer satisfaction. The right technology can help; inadequate technology will fail to keep pace and result in customer satisfaction failures.
Many organizations, even some very large ones, still use spreadsheets as a primary business operating software. Information is continually dumped from the Enterprise Resource Planning (ERP) or another source system into Excel. Then the data is updated, manipulated and potentially combined with other information like contracts or billing details. Finally, that Excel file is used to generate an invoice to customers. A long and arduous process for the business, this approach does not provide visibility or transparency for the customer.
In subscription or usage arrangements, customers want to see exactly what they are being charged for. If there is any doubt about how the fee is computed, a dispute may occur. Disputes can be costly to a company, especially if they have to maintain people on staff to handle communications with unhappy customers. And customer satisfaction will drop if customers must continually engage in dispute resolution with a vendor.
The potential for errors also increases when multiple Excel spreadsheets are used for accounting and financial management. As reported by the Association of Chartered Certified Accountants (ACCA), “More than 90 percent of spreadsheets contain serious errors, while more than 90 percent of users are convinced their models are error-free.”1 When these spreadsheets come under scrutiny during a financial statement audit, the auditors will typically obtain a copy of the files and test the report for accuracy. At this point, in-house accountants must often spend considerable time with auditors explaining what the Excel file is doing.
Companies must adopt stronger processes and software to help them manage governance, compliance, risk and complex billing/revenue recognition requirements. The first step to finding the right software is to study, document and understand exactly what an organization is doing. How do we bill our customers? What is our current revenue recognition policy? Are we following best practices or just doing things the way they have been done in the past? These important questions are typically addressed as part of a business process review or business process design. Understanding how things are currently happening can drive a better solution for the future. Senior leaders in the accounting function should spend time with other billing and operational employees to create a cross-functional competence around key processes. Plus, these brainstorming sessions add value inherently, as teams often discover better ways to design processes and systems so that the organization can function more efficiently.
Many times, organizations know that they are not doing things in the most efficient manner and want to improve; however, they just work with the toolsets they have been provided to get their job done as well as they can.
Another valuable output of joint cross-functional sessions is an understanding of the downstream effects of decisions. For instance, a salesperson may work with a customer to draw up a contract specific to the customer’s needs. The billing department may have no idea how to do the billing on these, so they just follow what is on the contract, not fully understanding exactly how it should be structured so that revenue can be appropriately recognized. Accounting then has to figure out how to recognize the revenue related to the contract, which may result in outside-of-system processes. Generally, these types of processes require multiple conversations between sales, operations, billing and accounting just to get a single customer invoiced – not exactly a scalable business practice! This is why many organizations just add people to the process without evaluating why something is done a certain way.
After a full system review has been completed, organizations should determine if the current processes can be streamlined and improved based on leading practices. For instance, is there a system the organization can put in place so that billing, sales and accounting are knowledgeable about a contract before it is executed by the customer?Should certain policies be put in place that prevent salespeople from executing contracts outside of a range of standard deviation?
Generally, after a full system review, businesses will look for software or technology to help streamline the process, keep up with the necessary data points and improve communication in the organization. As part of the business process review, a wealth of data is accumulated about how the organization needs to process information as it moves from sales to accounting. Many times, organizations know that they are not doing things in the most efficient manner and want to improve; however, they just work with the toolsets they have been provided to get their job done as well as they can.
From the business review document, organizations can go to market for new software solutions that can help optimize operations and improve the processes leading from sales to billing to accounting. In the past, companies had to hire costly selection consultants to help weed out the wrong solutions and gain a good understanding of what technology might fit the company. Today, however, there are so many options for researching software solutions that businesses can become overwhelmed. User rating sites like TrustRadius can be helpful to organizations in evaluating software. But it is also important to read industry analysts and experts in the field to ensure that companies are staying ahead of challenges or changes that might affect their industry, and thereby impact their business, in the future.
Technology is an enormous piece of the puzzle when it comes to helping companies improve processes and create scalable solutions as businesses evolve. Organizations should evaluate what pieces of a software or technology solution help to drive proper governance (segregation of duties), reduce business risk and ensure compliance with the proper accounting standards. An added value of a robust software selection is that audits should become easier, with less need to audit spreadsheets or manual filing cabinets. Additionally, technology should enable companies to adapt to changing market conditions more quickly without needing to add tremendous human capital to the organization. From the business process review, companies should have a firm and documented understanding of the requirements they need in a software solution.
Organizations should certainly consider various options and develop an approach to ensure consensus in the decision- making process for adopting a new technology.
The rate of change in business is accelerating, and it is important for finance and accounting departments to evaluate the risk associated with the adjustment. A firm understanding of current processes, coupled with excellent technological solutions, should help organizations mitigate risk, ensure compliance and create an accounting department that is ready to take on the challenges of a rapidly evolving future.