How do you project revenues in a SaaS or subscription business?
Revenue recognition for SaaS and subscription businesses, Parts I and II
Revenue Recognition, commonly referred to as rev rec or revenue rec, is an accounting principle and a process for reporting revenues by recognizing the monetary value of a transaction or contract over a period of time as the revenue is “earned.” The method of allocation and the period of time are determined by rules, guidelines, and findings from organizations such the Financial Accounting Standards Board (FASB) and the SEC.
Revenue recognition is an issue that arises when delivering solutions to the marketplace using term subscriptions or perpetual licenses. It is recommended that all companies with term subscriptions, private or public, understand the important concepts and adopt a process for financial reporting based on revenue recognition as early as practical.
Conceptually, revenue recognition is easy to understand. For example, a $120,000 annual subscription fee might simply be recognized as $10,000 per month during the subscription period.
In practice, revenue recognition can be extremely complicated as standards boards and regulatory agencies have established complex rules and guidelines to rein in on aggressive revenue recognition actions taken to inflate actual corporate performance of public companies. Revenue recognition can become extremely complex when you bundle services or support with your subscription, commit to delivery of any non-standard functions/capabilities, or when you agree to some customer acceptance criteria (“out clauses”).
The topic is too broad, too technical, and too complicated to cover in any depth in the SaaSpedia. There are hundreds and hundreds of pages written on the topic, mainly for CPAs who typically arbitrate the topic and issues for you.
That said, here are a few extremely important revenue recognition bullets: