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Are your revenue recognition forecasts little more than an educated guess? Or complete stab in the dark at worst?

For companies in manufacturing, IT, telecoms and many other industries, revenue recognition is a major challenge. What often happens is this.

The sales team update their opportunities in Salesforce. This creates a bottom-up forecast of the ‘sales’ value of deals that are expected to close successfully.

The VP of Finance takes this data and puts it into a spreadsheet. Or, because he doesn’t trust the sales teams’ forecasts, he maintains his own sales projection data. Either way, he then manipulates the spreadsheet to create a top-down revenue recognition projection.

Frequently neither forecast has any degree of reliability. Which leads to a lot of frustration all round.

The unreliability in the first forecast – the sales teams’ gross revenue figures – can be addressed by using reports and dashboards that give full visibility of the size, trend and quality of deals in the pipeline. The second – the accuracy of the revenue recognition forecast – can be tackled by using Product Schedules within Salesforce. Consider these two real-life examples.

  • Gilbarco Veeder Root is a global manufacturer of petrol pumps and associated retail equipment. When an Opportunity is won, delivery and invoicing has to be in line with the refurbishment programme in the customer’s chain of petrol stations. This might take 12 months or more. So Gilbarco uses Product Schedules to accurately forecast revenue recognition.
  • MAM Software creates and implements sophisticated software and hardware to manage end-to-end supply chains for their customers. Like many other companies MAM offers maintenance and support packages. But this future revenue can’t be recognised immediately. Product Schedules give MAM robust information on the future recurring revenue they can expect from support and maintenance contracts.

Product Schedules explained

A Product Schedule is a projection of recurring future revenue from a Product associated with an Opportunity in Salesforce. The Product Schedule is associated with the Product that is on the Opportunity rather than directly with the Opportunity itself. Let’s take this Opportunity as an example.

Opportunity in salesforce with three products two of which have Product Schedules

The total sales value of this Opportunity is £78,000. The Opportunity Stage is Negotiation so we’re looking at a pipeline deal. The Close Date shows that we expect the deal to complete in mid-April.

The Amount field value of £78,000 is the total value of the three Products that have been added to this Opportunity. We can see that we’re selling one capital item (the GenWatt Gasoline 300kw). We’ve added a Gold Annual Service Contract that has a total sales value of £24,000 and 30 days of Installation Services @ £800 per day.

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Look to the right of the Products. The checkbox shows that there’s a Product Schedule associated with the Service Contract and Installation Services.

Let’s drill down by clicking on the Installation Services. Here’s the screen shot that shows the Product Schedule. We’ve assumed Installation will take three months starting in April.

Product Schedule with three month Schedule

The Service Contract has a similar Product Schedule except that it’s for 12 months starting in April. We could have started the Schedule in a later month if the support arrangements don’t kick in until the installation is finished.

Here’s what the opportunity looks like from a revenue recognition perspective.

Salesforce dashhboard chart showing revenue recognition based on Product Schedule

The revenue of £40,000 that we’re projecting in April is made up of:

  • GenWatt Gasoline product with a total sales value of £30,000. There’s no Schedule associated with this product because it’s a one-off revenue item.
  • The first of the three months of Installation Services. The Product Schedule contributes £8,000 to the April revenue figure.
  • The first of 12 Product Schedule instalments from the Service Contract. We can see the remaining instalments panning out over the remainder of the year.

The same principle applies to May and June. They each contain £8,000 from the Installation Services Product Schedule plus £2,000 from the Service Contract. The other months show the remaining Service Contract Product Schedule. The total combined revenue shown on the chart is £78,000 – the same as the total sales value in the Amount field on the Opportunity.

We’re only showing the dashboard chart here but it’s based on an underlying report that gives all the detail. And of course in real-life both will show the projected revenue combined across all Product Schedules, rather than the single Opportunity we’ve displayed here.

One more thing. In our example the Product Schedule for the Installation Schedule was created manually. We assumed that it requires human intelligence to forecast how long the installation will take. But the Annual Service Contract is different. It’s for 12 months. And it’s always for 12 months.

Default Product Schedules

The Product representing the Annual Service Contract contains a ‘Default’ Product Schedule. That means that whenever this Product is added to an Opportunity, a 12 month Product Schedule is automatically added. Likewise, you can have a Product representing a 24 month service contract, or any other time period for that matter, and add an appropriate Default Product Schedule.

Product Schedules are an excellent way of using Salesforce to accurately predict revenue recognition. Admittedly it’s one of the more complex areas of Salesforce to configure. There’s a moderate amount of online material but you might also want to get some expert advice and help. Naturally we’d be happy if you chose to get that advice from us!

Read our latest blog post on using product schedules to manage recurring revenue forecasts.

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