3 subscription business accounting pain points that can be solved with recurring billing platforms
- Jun 12, 2019 | Serge Frigon
When a subscription business pursues recurring billing solutions, it’s usually to address specific pain points.
The legacy systems of subscription businesses often only focus on one of the major accounting ledgers: cash. However, an accounting department deals with the entire business, including all expenses, assets, and liabilities. In addition to the cash ledger, it keeps highly volatile sales ledgers, including but not limited to:
- Accounts receivables
- Deferred revenue
- Earned revenue
When you factor in a recurring billing component, these ledgers can go into overdrive. A business may have 1,000 customers. And, if that business generates revenue from monthly subscribers, those 1,000 invoices must be sent out every month, ad infinitum.
Major considerations for setting up recurring billing
When setting up a new recurring billing system, businesses should consider:
- What customers see and experience. A modern recurring billing system can ensure invoices, receipts, email communications, registration pages, and self-service portals (SSPs) for customers are on brand. Additionally, dunning management emails can automatically communicate issues with a payment method, or remind customers in advance that a credit card is set to expire.
- What accountants see when they close the books. Billing platforms need to speak the language of accountants: Dual-entry accounting distinguishes sales from collections, which is essential with recurring billing.
Recurring billing systems should also address some of the primary pain points accountants encounter with recurring billing.
Accounting pain point #1: All financial transactions need to talk to their General Ledger (GL) system.
Accounting systems need a solid recurring billing platform, like QuickBooks Online, NetSuite, Xero, Great Plains, Oracle, etc., that can move all the ledgers referenced above.
Without a solid recurring billing platform, businesses have to rely on manual entry. As humans, we are 60 percent accurate. We’d like to think we’re less error-prone, but the cold, hard truth is that if humans are responsible for inputting all billing transactions into an accounting system, mistakes — often costly ones — will be made.
As a business grows, those errors will become more prevalent: As more demands are placed on a growing business’s billing department, people are more likely to take shortcuts. And in the accounting world, shortcuts is a profane word.
For example, shortcuts may:
- Process all transactions under a singular billing entity
- Combine transactions in order to reduce volume
Such shortcuts compromise the audit trail, or lose it altogether. For accountants, this is devastating: Having a lengthy paper trail to explain an invoice’s changes from three years back is better than having that invoice deleted or merged with other transactions.
If accountants lose the audit trail in their accounting system, they can't prove their numbers. That’s not just an accounting headache; it’s a full-blown migraine.
A robust recurring billing platform can easily manage every customer, every invoice, and every transaction. It can push all the information into the accounting platform of choice — without the costly errors of manual entry.
Accounting pain point #2: Accountants need a recurring billing process that speaks their language.
Many recurring billing platforms aren’t built for dual-entry accounting, so they don’t speak the language fluently. Several deal only with cash, and not every payment made is in cash. A payment needs to be put into two different categories: corresponding offsetting debits, and credits.
Sales are recorded as Accounts Receivables (AR). Payments draw down a customer’s “balance,” which is actually the remaining AR for that customer. It’s like at a bank: You think of your balance at a bank as cash on hand, but actually, your balance is money the bank owes you.
Using a subscription business as an example, when a customer has a $10/month subscription, the business owes the customer $10 per month. This is typically paid back in product or service, but it’s an important differentiation. Reversals and refunds need to be processed as separate ledger entries. Charges can be reversed, while payments are refunded.
If a customer decides to cancel a subscription after making a payment, the business actually has to do two things: Give the money back to the credit card, which is a refund, and reverse the charge to indicate that the customer doesn't owe $10 every future month.
To improve both accuracy and efficiency, a subscription management platform must be equipped to handle this sort of dual-language functionality.
Accounting pain point #3: Accountants need to differentiate revenue recognition.
A big challenge for service businesses is recording revenue when value is delivered. A business that provides services typically charges a customer up front, with the agreement that the customer has access to the service for a specific period of time (e.g., a week, month, quarter, or year).
According to Generally Accepted Accounting Principles ASC 606 compliance mandates, a subscription business cannot record revenue until the value is delivered. Revenue recognition breaks payments into deferred and earned, or recognized, revenue.
In the case of the $10 monthly subscription example mentioned above, the full $10 cannot be recognized as revenue on the first day of the billing period. Instead, $.33 is recognized each day for the duration of the period. So, on day 15, $4.95 will be earned revenue, while $5.05 remains deferred revenue.
Adjustments may be needed to account for:
- Downgrades (when a customer removes features or services)
- Free trial periods
- Upgrades (when a customer adds features or services)
Billing systems have to keep up with all those adjustments in real time, and manual entry will likely result in incorrect revenue recognition. When revenue recognition is calculated correctly, there’s no remaining deferred revenue at the end of every month/quarter/year, when the accountants close their books.
Recurring billing software streamlines the process and frees revenue recognition from errors. By implementing this software, accountants can close their books in a matter of hours, not days.
A recurring billing platform with powerful revenue recognition capabilities allows accountants to configure and report on revenue recognition at any moment within the billing period. A comprehensive recurring billing platform also integrates with taxation software, which does the heavy lifting on sales tax compliance requirements.
The right technological solution in a recurring billing platform is an economic bridge between a business and its customers, enabling businesses to achieve predictable recurring revenue. When a business begins to scale, an efficient subscription billing process is a strategic necessity. Learn what you need to implement a complete subscription billing process for your business.