Projects in general must deal with the challenges of managing scope, schedule, resources, quality, et al. Compared with projects in other industries, professional services projects must deal with another unique challenge – that of revenue recognition. You may be wondering – “We have so many Project Management Software and PSA Software solutions available. Don’t they address revenue recognition?”
Revenue recognition is determined based on the relevant accounting standards such as the International Accounting Standards, Indian Accounting Standards, UK Accounting Standards, and so on. While there are some differences between these standards, the general principles are similar.
What do these accounting standards talk about revenue recognition?
- Revenue recognition emphasizes on the timing of recognition of revenue in the statement of profit and loss of an enterprise.
- The amount of revenue arising from a transaction is usually determined by an agreement between the parties involved in the transaction.
- When uncertainties arise regarding the determination of the amount or its associated costs, these uncertainties may influence the timing of the revenue.
Revenue Recognition and Contract Types
Ask your folks in the finance department and they would explain the complications associated with revenue recognition. Projects undertaken by professional services firms are influenced by diverse types of contracts including –
- Fixed Price Contract
- Time & Material Contract
- Cost Reimbursable Contract
It is very common to find professional services firms pick up projects with deliverables that involve all the three types of contracts – in some cases with incentive and penalty clauses as well!
Why should we worry about revenue recognition?
Revenue recognition is closely linked to the quantum of work completed and confirmed by the customer. Based on the customer acceptance document(s), revenues could be recognized, invoices are raised, and payments are released by the customer. And this is how an organization’s cashflow gets impacted.
Most organizations struggle with –
- Inaccurate revenue recognition
- Missed or lost revenue recognition a.k.a. revenue leakage
- Delayed revenue recognition
- Conflicts with customers due to disagreements about revenue to be recognized.
Inaccuracies, delays, or lost revenue recognition could have significant implications on the cashflow. Imagine the implications of USD 100K of lost revenue or revenue recognition getting delayed by a month or two!
It is not enough to deliver a profitable project – profits are meaningless without cashflow!
What makes Revenue Recognition a major challenge in PSA projects?
Now, imagine an IT industry project worth just USD 500K which has elements of fixed price contract, time & material contract, and some cost reimbursable contract.
Let us assume that there are twenty key deliverables for which the customer shall pay the delivery/performing organization.
Let us hope that the project manager has the schedule, resources, and budget in place – and approved as baselines. Using a scheduling software, the project team would create a schedule based on a well-designed work breakdown structure with phases, milestones, tasks, sub-tasks, etc. Like every project, teams focus on executing their tasks and tracking actual effort and costs incurred. In the process, the team members would also report their timesheets to reflect their effort and the associated tasks.
Where is revenue recognition in this process?
Unfortunately, most of the PSA Software for IT companies do not offer capabilities for revenue recognition – the reason is: revenue recognition is complex and is based on multiple and diverse rules.
What do the finance team in most companies do?
The finance analysts have to follow-up with the project managers, have detailed discussions on the costs spent, deliverables completed, and then they ‘compute’ revenue to be recognized based on ‘certain rules!’ Invariably, this process is a rocky ride for both the project manager as well as the finance team – the project manager, in most cases, is focused on project delivery and customer satisfaction, while the finance team is focused on revenue recognition and cashflow. The conflict is there for all to see!
How could the revenue recognition process be made comfortable?
The best PSA tool or an Online PSA Software solution such as TouchBaseTM is designed to allow project managers and finance analysts discuss and agree upon ‘business-rules’ based on which ‘a specific percentage’ of revenue is ‘automatically’ recognized based on –
- Work completion status
- Project team member timesheet reports
- Customer acceptance
For an Online PSA Software to be able to accomplish the above three dimensions, it is vital that the professional services automation is built on a design strategy of ‘high configurability’ – of business processes, workflows, and decision-nodes by allowing relevant stakeholders offer their ‘acceptance or rejection’ to deliverables. This is exactly how TouchBaseTM PSA Software is so uniquely placed to completely simplify the process of revenue recognition and further to automated client billing.
Such a solution would be a blessing to both – the finance manager as well as the project manager!
The future of professional services automation or Online PSA Software is calling!