By Megan O’Brien, finance and business editor
By Joseph Clancey, Product Marketing Specialist
Companies that work on long-term projects, or bill customers at regular intervals based on contracts in place, frequently receive payment before the entire project is complete or the service delivered. Under U.S. generally accepted accounting principals (GAAP) and international accounting standards, a business can't recognize that revenue until it delivers the goods or services to a customer.
Accounting for project revenue that's earned over time using intervals and milestones can be a lot more complicated than accounting for revenue earned all at once, like delivering a physical product. Project revenue must be properly and accurately billed and recognized at the right time so that the organization is working with the accurate data to efficiently run its business, staying compliant and ultimately increasing project profitability.
However, without the right solution, managing revenue recognition can become time-consuming, complicated and expensive.
Why Project Revenue Recognition Can be Challenging
Manual Processes. One of the primary challenges with recognizing revenue on projects is the countless hours that can be spent running through line items and calculations in spreadsheets to reconcile month-end close or the completion of a project. Without automated processes like dynamic resource and cost allocation charts, organizations have to run these processes manually, which can be cumbersome and become a logistical nightmare for services organizations that typically rely on efficiency to stay profitable. This manual work leads to data errors and wasted time that can better be spent elsewhere. The right software can connect project cost and deliverables to financials with much less time and effort.
Lack of Flexibility. Managing different types of contracts on different projects, like lump sum or fixed-price contracts, can be a struggle for many services firms that aren’t properly set up for these contract complexities. Recognizing that revenue too fast or too slow can create cash flow issues. And, when organizations don’t have flexibility or the ability to process different types of contracts, they may miss out on business opportunities. Without continuous real-time data, the situation can get even worse. It becomes difficult for project teams to determine if they are running over budget and plan against performance obligations or task completions.
Poor Control. For projects, setting up revenue rules right the first time is paramount. This tells core project and financial systems and teams to recognize revenue at specific times as goods or services are completed. When service organizations don’t have clear back-end revenue recognition rules set up during projects, allocating costs of resources can become a manual process again and, without the automation tools to implement the rules, they lose control over when billing needs to take place or recognizing project completion and the revenue it generates.
Ineffective Reporting. When services organizations rely on manual work for reporting and can’t get real-time data for project financials, revenue recognition efforts run into delays and inaccuracies. For example, if a team spent extra hours working on a portion of a project or moved around resources that bill at different rates, the business may need to renegotiate contracts or change target dates. Without real-time automated reports to capture budgets vs. actuals, revenue and profitability forecasting, it’s going to take more time to accurately recognize the revenue.
The Key is an Automation Solution
With a professional services automation (PSA) solution that connects the company’s projects to financial, CRM and HR data, companies can gain better control over revenue recognition. PSA software can help services businesses:
- Increase automation so that teams can spend less time on spreadsheets, repetitive data entry and month-end activities. Let a PSA solution handle the hard work of complying with accounting standards like ASC 606 and IFRS 15 so that revenue can be reported at the right time.
- Enable project managers to stay nimble with performance obligations and the different types of contracts that some projects require to ensure revenue from each line item is managed correctly. No two project or customer are the same, so being able to manage the multiple types of contract like lump-sum or fixed rate with the help of a PSA solution lead to better efficiency.
- Optimize project and financial controls with rule-based handling frameworks that recognize revenue automatically based on the assigned schedule or milestone, improving compliance.
- Gain financial insights with more effective reporting so that project managers and finance leaders can monitor cost allocations, billing, invoicing and forecast revenue for the different types of contracts set by teams.
SuiteProjects Unifies Project Revenue with Company Success
NetSuite SuiteProjects is designed to help services-based businesses simplify project accounting by automating these complex project deployments so that projects are successfully completed on time and recognizing revenue based on different contracts are easier to manage. SuiteProjects enables teams to automate processes and ensure accurate accounting and billing. It also allows organizations to recognizing revenue separate from project billing to ensure the accuracy of financial statements and safeguard compliance, as well as provide greater forecasting insight. SuiteProjects brings together all these elements in a single solution so that organizations ultimately can operate and deliver projects more efficiently.
To learn more about how SuiteProjects, watch this SuiteFundamentals Revenue Recognition product demo webinar.