Order to CA$H

Nothing is more exciting than when that signed sales order returns from the customer. Gongs are rung; KPIs or metrics spreadsheets are updated; sales start calculating what that paycheck looks like. But what happens after that? How does that signed sales order translate into cash in the company’s bank?  This can be a critical process for a company, and when done well can help bolster the company’s cash flow and accelerate company growth. However, if mismanaged, it could create a proverbial leaky roof that creates headaches and distractions.

A solid order to cash (or, as the cool kids call it, O2C) process can be tricky to perfect in a early stage, growing company. If too few people are involved , you run into single point of failure or capacity related delays in billings. If too many people are involved, you might run into data fragmentation or too many chances to miss a handoff.  A delay, error, or misunderstanding of the process could yield a wide range of problems including:

 

  • Miscommunication to key stakeholders. This is especially true if you don’t have a solid grasp of the difference between bookings vs. billings vs. revenue. The booking occurs when you close the deal, but if you slip with the billing of the customer, you’ll never recognize the revenue. And key stakeholders (read: investors) really care about actual revenue over an inflated KPI dashboard.
  • Frustrated Sales team. When your sales team busts their ass to close a deal, the last thing you want to do is make them wait an eternity to get that commission (note, I’m making a hopeful assumption you pay commissions only once customers pay first…). Every day that passes without the customer paying, the probability of sales distraction increases. Often times you end up with a sales team member tracking down late payments. While this may be necessary, if they are doing this, it means they are not able to do their main job: SELL.
  • Cash flow constraints. This may be the most obvious, yet most important headache. If you are constantly struggling to get customers to pay timely, it’s almost like a double whammy: they are using your product (which costs your company money to run) but you aren’t getting the resources from them needed to pay those bills. Here’s an even worse scenario: what if you make a significant purchase decision based on the *expected* cash from a new customer but then struggle to get the cash in the door? It could be a very costly mistake for your business.

But fear not. You can avoid most of these problems with just a little bit of effort and organization. Here are a few of my suggestions to improve your O2C process:

 

  • Well organized CRM – A well organized CRM with dedicated fields for customer contract and/or billing info (i.e. billing date, billing amount, contract type, payment method) goes a long way when reconciling what should have been billed vs. what has been billed. Being able to run a quick report to compare against your billing system makes the monthly reconciliation process much smoother.
  • Accept credit cards and be cool with the fees. Some people prefer to be paid via check or ACH to avoid the ~3% credit card fee haircut. In the early days when you need that cash ASAP, the 3% fee is well worth the speed to get the cash in the door. Waiting for someone to pay via check or ACH is entirely out of your hands and you’d be amazed at how easy it is to forget to pay a vendor. I know because I’ve had my fair share of forgets….   🙂
  • Invest in a good billing software – Find a software that makes it easy to take people’s money. This seems like a “duh” statement, but you’d be surprised at how confusing or deficient some billing software can be. I’ve used Chargify and Recurly before (both use Stripe as the actual backend payment processor), and while I haven’t found the perfect billing software, they work well for me now. **Note, I’m assuming the use of credit cards to accept payment here.
  • Integrate billing links into the Sales Order. This may be my favorite one. Chargify and Recurly allow you to create a link for each of your products and/or subscriptions to share with customers in order to capture their billing info. If you make this a required field in the Sales Order, you’ll have arguably the most important step in the O2C process completed the minute the sale closes!

 

At the end of the day, your bookings are great but cash is king. If you take the time to focus on the process to ensure those bookings turn into cash as fast as possible, then one day you’ll be swimming in a pool of gold coins just like Scrooge McDuck.

scrooge-mcduck-swimming-in-money

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The Revenue Recognition Pain

Originally posted on the Blog of ProRata.

Revenue recognition rules might go down as one of the most “accounting-iest” concepts out there. You’re telling me that after a customer pays money for something just sold, specific rules need to be followed to record that revenue correctly in the financial statements? Well, if you report your financial statements on an accrual basis (and you should be if you are a growing company), the answer to that question is “yes.”

An Accounting 101 definition of revenue recognition simply dictates that a company cannot recognize revenue until the goods being sold or the services being provided have been delivered to the customer. Software has always been more complicated from a revenue recognition perspective, so much so that PwC had to release a 300 page “user friendly” guide to assist. Fortunately, that guide is more aimed at large, public companies with complex software licensing, not smaller, private companies with a subscription-based revenue model.

Subscription based software revenue recognition is pretty simple: you must recognize the total amount the customer pays evenly over the term of the contract. Let’s break this down using the same dollar amount a customer pays over three different contract terms. Say a customer pays $1,200 to use your software over these three different terms:

  • Monthly contract – The $1,200 can generally be recognized in full right when invoiced or charged since the customer will have access to use the software for the next 30 days.
  • Quarterly contract – You will have to recognize $400 a month for the three-month term of the contract.
  • Annual contract – You will have to recognize $100 a month for the twelve-month term of the contract.

As you can see, this isn’t nearly as scary as it sounded earlier in the blog. However, this is where the pain kicks in: how do you actually make this happen in your accounting software? For as great as Quickbooks might be at providing a cheap and effective accounting solution, it cannot automate this task. So here are your options:

  • Set up recurring journal entries on the front end. This requires multiple tedious steps and also presents a reconciliation nightmare if a human error occurs somewhere along the way or something changes. Not scalable.
  • Create a revenue recognition worksheet in excel. This is better, but it still requires additional work to build and maintain if you want to scale it. Not to mention, there is still a risk of error if one measly formula goes out of whack. Not 100% scalable.
  • Pay minimum of $12,000 a year for a clunky enterprise accounting software to automate. Nope.

Here’s where ProRata saves the day. ProRata integrates with Quickbooks to automatically create and record the correct revenue recognition journal entries for each contract. The real beauty of this is that ProRata sets up this automation upon creation of the customer invoice — no extra steps needed! ProRata can be so powerful for a growing company by saving time, eliminating reconciliation headaches, and improving financial statement accuracy.

Proper revenue recognition is a necessary evil for a growing subscription based company. But this evil becomes less daunting when you have the power of automation at your fingertips.