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The saying: “turnover is vanity, profit is sanity but cash flow is reality” retains an enduring resonance because all too often organisations fall into the trap of equating impressive sales results with hard cash in the bank.
When organisations make this assumption it’s a sure sign that they will experience financial difficulties in the not too distant future, simply because they counted their metaphorical chickens before they’d hatched.
Financial decision-making cannot be based merely upon sales figures because there are a number of uncontrollable variables that businesses are faced with that potentially prevent deals etched on the sales ledger from ever appearing as funds on the balance sheet. Non-payment, returns or delayed projects all threaten an organisations’ cash position, meaning that it is important for finance personnel to present a true picture of the state of a business in this regard.
This is why the principle of revenue recognition, which ensures that organisations avoid the confusion between the sales ledger and the balance sheet, is considered an integral part of GAAP. In practice, the application of revenue recognition sees sales recorded as cash, only once payment has been received or the returns period for a product has elapsed for example. By protecting sales from appearing as cash due to non-payment or clawback, it thereby safeguards the enterprise from spending what it doesn’t have.
Although this is a relatively simple principle to apply in theory, businesses are such complex organisms that revenue recognition is actually quite difficult to adopt in practice, particularly in larger organisations with complicated business models.
This is because it requires visibility over the entire sales-cash cycle, involving the tracking of funds from the order to invoice to revenue recognition through to the general ledger. For this to be achieved, a great deal of work integrating departmental functions needs to be carried out to ensure that every step of the process remains in sync and accurate.
For businesses such as independent convenient stores this isn’t really a problem. Revenue is essentially recognised at the point of sale because there are very few returns and payment is instant. However, in larger organisations, particularly in those where receipt of payment occurs before goods or services have been provided, revenue recognition is vitally important. It has strong implications for forecasting, planning and the long-term sustainability of the enterprise.
To ensure that this process runs smoothly from an operational standpoint, organisations can adopt ERP systems to provide that vital link between sales and finance, as well as to other departmental functions. The intention is to integrate the activities of frontline sales and back office staff in order to produce automated revenue calculations that give a realistic account of the business’ position, thereby helping them to create accurate forecasts. In the main, these systems have promised more than they’ve delivered due to significant technological and usability barriers, and this is why the concept of a cloud-based revenue recognition software solution has gathered serious momentum.
Harnessing the power of cloud, new solutions integrate and provide visibility over the revenue cycle by making data connections throughout the organisation. By providing real-time dashboards and reporting through a fully integrated solution automated at every touchpoint, the result is greater ease of use and added flexibility, in addition to better data integrity.
In short, enhanced visibility, integration and traceability set cloud-based solutions apart.
Cloud-based revenue recognition software integrated across the enterprise will enable your company to move past complex spreadsheets and become more productive. Speed, visibility, accuracy and compliance will be improved and it will facilitate a great deal of flexibility in terms of modifying process according to need.
Built around business need, cloud-based revenue recognition solutions are the stepchange organisations require in order to take full ownership of their financial information.
Find out more about how Xledger can help you.