5 Tips on ASC 606 From a Fast-growth SaaS Peer
I recently led a best practices webinar on ASC 606. Our panel of ASC 606 experts shared fantastic insights that would benefit growing subscription and SaaS companies who haven’t yet tackled or are still struggling to comply with the accounting, financial reporting, and revenue recognition from ASC 606. Let me introduce the panelists and share a few of the fantastic insights from the discussion.
The tips we discussed fall into five main buckets:
- It’s a team effort
- Think about processes across teams and systems in order to automate and scale
- Read your contracts to know the promises made, both explicit, and implicit
- Build a deal desk
- Automate with five steps
To watch an on-demand recording of the webinar, go here.
Our panel of finance experts
- Tony Sondhi, President, A.C. Sondhi & Associates—Tony founded and runs A. C. Sondhi & Associates, LLC, a financial consulting and investment advisory firm. His areas of expertise include revenue, lease, securitization, and reporting. He has served as an expert witness and helped companies with SEC Comment Letters. Tony is a member of the Emerging Issues Task Force (EITF) of the FASB and a member of the Investor Advisory Group of the PCAOB.
- Emily Drahzal, Manager, Revenue Operations, Acquia—Emily started her career as an auditor at a top accounting firm and has led financial reporting at several fast-growth Boston SaaS companies. She was recently promoted to a key new role within Acquia managing the relationship and revenue between Sales and Finance as they scale. Acquia is the open source digital experience company, and the largest provider of solutions for the Drupal platform. They have over 4,000 customers around the world with a fantastic land-and-expand pricing model across both perpetual and subscription revenues.
- Audra Weller, Customer Success Advocate, Sage Intacct—Audra recently made the jump from deploying and running the accounting system for one of the top healthcare AI firms, to applying her experience with helping Sage Intacct’s SaaS and subscription customers in their deployments. She has experience and background in revenue recognition, projects, capitalized software, business process improvement, and user adoption training.
1. It’s a team effort
Despite what many think, ASC 606 and revenue recognition is not just an accounting exercise. It takes Sales and Finance working together on the same goal. Despite potentially having different paths to get there, the teams all have the same goal of earning and retaining customers and revenues. As a great mentor of mine once said, “There is selling, and then there is counting, and both are critical.” Depending on the stage of the company, size of your customers, and maturity of your market, you may have been able to standardize your contracting and sales concessions. Accounting loves standardization for its’ efficiency. Sales loves flexibility to close the deal. Both are important, and you need to work together find the right balance.
2. Think about processes across teams and systems in order to automate and scale
You need to understand the processes for the company. Map them out—both the as-is stage and the to-be stage going forward. Building the quote-to-cash process is a critical early step. High-volume companies manage this through the payment gateway. Companies with larger average contract value (ACV) often choose a CPQ (configure, price, quote) tool to bring automation to the quoting process to maximize consistency, upselling, and predictability. How well you automate these CRM processes is key. Equally important is how you integrate this data into the financial system so that you can immediately bill, recognize, and report on it. Thinking through the process mapping is a key cross-departmental process.
Acquia struggled with this when we started to think about adopting 606. I'm sure a lot of other companies will struggle with this. Not all of our contracting information is captured in our sales configuration system. We use Salesforce. I think a lot of other companies use Salesforce, but there was a lot of information that we needed to get that was in our contracts, within the four corners of our contract, that was maybe not in the best format.
For example, sometimes sales representatives type in some information in an open text field. Unfortunately, that's not easily transferable to another system. You can't really get that in. You can't really analyze it either. You can't report on it.
We went through a massive effort with our Sales Ops team and with our Salesforce team to get all of the information that is in our contract in the system, in a way that we can transfer that information over to Sage Intacct.
We were really successful in that. In our quote to cash process, by the time the contract is signed, we can actually hit a button, and all of the information will be already filled out. It’s synchronized to Sage Intacct without much manual intervention whatsoever. All of the things that we need for 606, we have in Salesforce in a very reportable way. We're able to get that into Sage Intacct as well.
3. Read the contract to know the promises made, both explicit, and implicit
What is a performance obligation? A performance obligation is any goods and/or services you promised in the sales cycle. These are often explicitly stated in your agreement but sometimes can be implicit and weaved into a common business process. You need to keep in mind the small print in the free-text fields in the sales orders. Digging into the promises the company made as you figured out product-market fit can take time. There are often free-text fields on the contract. Finding the implicit promises that have been made can be even more time-consuming. Examples include offering free passes to a customer conference or training at that conference. This ties back to tip one, working together as a team on the common goal of maximizing customer value and earning the revenue that comes from it.
Yes. Fundamentally, what's probably the most critical component here is you need a very good sense of your contracts. As Emily and Audra have been pointing out, and particularly as Emily pointed out, with respect to where your data is and so on, and particularly those kinds of things where the salespeople fill in open text fields...
My favorite, of course, is when I'm reading a contract, I discover that in the margins somebody has put, in pen or pencil, some additional piece, which could be another promise to the customer. You have to make sure you capture those.
At the same time that you need information about your contracts, it's critical to have a very good sense of your different revenue streams. Of course, for SaaS companies, the simplest way to think about it is that you might still be selling some licenses, and the rest of your customers are in the cloud where they don't get a license. They have a right to use and access your software, but they don't have a license to it. It's sort of that sense and that understanding of contracts and your different business models or revenue streams.
Then I think over all of this—you've got to start building your sense of how many nonstandard contracts you have, and how many nonstandard clauses you have within the contract.
For example, you normally allow your customers 30 days to pay, then you come across a contract where the customer asked for and received 6 months to pay. Or you have customers in the Middle East who signed the contract and agreed to pay you within 30 days, but their practice is to pay after seven or eight months, so that's what they're going to do. You have to then start thinking about classes of customers, so that you can treat them differently.
4. Build a deal desk
As these pieces come together, a new team that pays attention across both Sales and the Finance team has emerged, the Revenue Operations team. It is a team to bridge both Sales and Finance to work towards the same goals, with communication to be a critical linkage in the sales, contracting, and revenue recognitions processes.
Our deal desk was really born out of, we call it Sales Operations, but it was born out of the constant struggle between Sales and Finance to get on the same page. Sales and Finance have a very storied history. We always seem to butt heads over basically everything, but our Sales Operations team are the conduit between Sales and Finance. They have a little bit of finance, and they have a little bit of sales. They understand what the sales people want, and they understand what the finance people need. I have to say, the Sales Ops people that we have at Acquia are some of the most appreciated people, because finance people don't often speak the same language as sales. It's almost like a Rosetta Stone between the two.
Our deal desk is really instrumental in keeping our contract standards and keeping the cash rolling, helping sales configure and also helping us keep ourselves from getting into positions that could potentially hurt our revenue recognition. It's a great role. I've seen a lot of it. I've seen a lot of revenue operations roles that are also popping up, just within my network. It seems to be, over the past three years, something that's really gained momentum in the marketplace.
5. Automate with five steps
- Integrate order with financials—It all starts with a native integration with Salesforce.com and Salesforce CPQ. This allows you to seamlessly pass account and order or contract information, with real-time synching on the account master and product catalog.
- Innovative billing—You are able to automate subscription and professional services billing across a wide variety of use cases—by user, module, product, type of sale, etc.—to price your products based on the value you bring and the recurring use by your clients.
- One contract master--Means automated renewal management and upsells are posted back to the original contract, so that you know the discount and payment terms and incorporate the performance obligations. Having the billing line items integrated and automated allows you to do automated revenue recognition, tracking the performance obligations and variable considerations over the term of the contract, in both ASC 605 and ASC 606. Then you understand the impact to revenue recognition and expense amortization, particularly with commissions. Automated subscription billing means automated invoicing, which reduces DSO and increases cash flow.
- Dashboards—When all of this upstream work is automated, you can post to the general ledger with an unlimited number of dimensions, incorporating both GAAP and SaaS data from statistical accounts. This, in turn, supplies the data for real-time SaaS dashboards. Finance can provide the P/L leaders the information they need on the 5 Cs and other SaaS metrics, such as unit economics, CLTV, net and gross churn, and CAC. It’s nirvana because you have the contract master record and can manage all the renewals and upsells tied back to the original contract. You can forecast out the billing, cash, and revenue in your FP&A budget and planning. This gives you confidence to make big business decisions on hiring, new product launches, fund raising, acquisitions, and “kicking your competitor to the curb”.
- Forecast the future across revenue, cash, and billing—This approach is very different from subscription-billing-only solutions that don’t let you forecast billing, revenue, and cash. It’s also different from other cloud financials providers that are order-based and have built complex revenue arrangements to compensate, without native integrations to Salesforce.com. This complicates the data model and forces manual reporting and forecasting. By knowing the amount, timing, and collection of cash from the contract, you can make data-driven decisions.
How can all of this come together? Here are the outcomes from Emily and her team’s efforts in not only rolling out ASC 606, but also transforming how they came together as a team to manage the future of their subscription contracts at Acquia.
David Appel is the Head of Software & SaaS at Sage Intacct, and is passionate about creating great B2B SAAS companies. Over time he has developed a series of SMB, Mid-Market, and Enterprise customer-lifecycle playbooks that focus on creating value for customers, increasing return for shareholders, and building great teams, that have generated over $1.1B in market capitalization for his clients.