Managing subscription billing services and keeping an eye on the income your business makes has always been an important part of using a subscription technology platform. Many conventional companies such as Hello Magazine, the consumer pays a yearly subscription in advance to get the publication every month and in return, Hello Magazine makes a promises to deliver every issue for 12 months and because it is a weekly publication they will send a copy every week for a year.
The subscription billing platform essentially alters the essence of the synergy between the company and the consumer. The crucial difference is that the company charges consumers a fee up front for a product or service that will be delivered over an agreed period of time.
When a company debits funds for a service that they aim to distribute in the future, certain bookkeeping procedures must be adhered to make sure funds are properly managed and accounted for. Revenue recognition or deferred revenue needs to be applied when managing all the incomes from subscriptions to keep track of all activity.
Understanding Revenue Recognition and How It Works
If we take for example Netflix, a video streaming service available on most platforms and devices, we can use their model to better understand revenue recognition.
- Netflix incorporates SaaS technology and this helps the business produce streaming software to run their service for consumers to watch films and shows.
- Netflix charges a subscription fee of £5.99 a month for its basic package (after first-month free promotion) and will be recurring till the consumer cancels.
- Netflix will charge £5.99 every month on a specific date or each month on the date you signed up and as long as this payment is made each month, Netflix will give you continued uninterrupted access to its streaming service.
On the first day of when your subscription becomes chargeable, Netflix will charge your account £5.99 and this money goes into Netflix's account. Even though Netflix took £5.99 from the consumers account this is still not completely considered recognised revenue because Netflix needs to deliver what they promised from their video streaming service. The customer has paid in advance and Netflix needs to fulfil its obligations of 30 days worth of streaming services.
If Netflix only gives the customer 2 days service for some reason and the service cuts out then the this becomes deferred revenue. Action needs to be taken by Netflix to return any monies owed back to the customer or deliver what they promised making an alternative arrangement because of failures in delivering their service.
What Is The Importance of Revenue Recognition
Revenue recognition is significant for any business and tracking any income taken in advance running a subscription-based platform is imperative for the model to work.
Many companies make the mistake of not accounting for deferred revenue properly because they believe this is on visible to insiders of the business but this is not the case. External auditors will want to see financial statements to see how the business is being run and meeting financial regulation. Accounting for deferred revenue is also hugely important as future investors, shareholders, and regulators will want to see accurate financial reports and don't want to see the company using deferred revenue as guaranteed money that the business will receive and can be misleading. The company needs to account for any issues where refunds may have to be given.
Deferred revenue is not considered an asset but a liability. The reason deferred revenue is considered a liability is that it is based on the guarantee to distribute the service that the company has promised that the customer has paid in advance for. To get a better idea of the business's cash flow projections and revenues this will require deferred revenue to monitored and logged accurately.
Companies Expanding Publicly
Various businesses have strategies in place and going public is one of the biggest moves a company can make which is day one of the business. Businesses who have incorporated the use of a subscription platform then revenue recognition connotations must be displayed on financial reports that monitor deferred and recognised income accurately.
Tracking And Logging Cancelations and Refunds
Many companies don't tend to have a cancellation or refund policy on monthly or 30-day subscriptions, but this does not always apply to 6 month or yearly subscription services. By monitoring and tracing deferred revenue it makes handling and managing customers refund or cancellations requests promptly and methodically.