How to Manage Revenue Recognition in Salesforce | With Examples
How to Manage Revenue Recognition in Salesforce | With Examples
Contact usTracking revenue recognition in Salesforce is a powerful capability that delivers many benefits.
That’s especially true if your opportunity revenue accrues over time.
Nevertheless, many companies find achieving these benefits challenging because they are unsure how to approach revenue recognition in Salesforce.
So, if you’re curious about the benefits and how to achieve them, read on.
Revenue Recognition and Billing Schedules
In this article, I mainly focus on how and why you should track revenue recognition in Salesforce.
However, people occasionally confuse revenue recognition and billing schedules, so for good measure, I’ll explain the difference and show you how to manage billing schedules in Salesforce.
To be clear about the difference:
- Revenue recognition reflects how you earn opportunity income over time. We can include earned income in our bottom-line profit calculations.
- The billing cycle refers to when the customer is invoiced.
For example, let’s say you have an agreement in which you need to provide a product or service for twelve months. That means you can recognize one-twelfth of the value of the total income each month. By the end of the contract, you will have earned or recognized the full amount.
However, you could invoice the customer monthly, quarterly, or a single amount upfront. That’s the billing cycle.
Five Reasons to Track Revenue Recognition in Salesforce
Why would you want to track revenue recognition in Salesforce?
After all, most companies use their accounting system to calculate earned income. And no one is pretending Salesforce can produce GAAP-quality revenue recognition reporting.
Nevertheless, there are five reasons for tracking revenue recognition in Salesforce.
- Reporting power. Salesforce provides a more flexible and visual reporting facility than any accounting system.
- Accessibility and timeliness. Most sales managers and other internal stakeholders access Salesforce daily and know how to use it. In contrast, access to the accounting system is likely to be tightly controlled, meaning sales executives often rely on weekly or monthly spreadsheets produced by the finance team.
- Link to won opportunities. Revenue recognition profiles in Salesforce link directly to the won opportunities and products delivering the revenue. This feature facilitates analysis and reporting on revenue recognition by customer, segment, territory, and other parameters.
- Actionable insights. Pipeline opportunities in Salesforce also have revenue recognition profiles. As a result, the information is actionable-you can see which opportunities need closing and their potential impact on the revenue recognition forecast.
- Target tracking. You can measure revenue recognition from opportunities by using a report to track against a target you hold in your head; alternatively, you can use the target feature within the app, Product Schedules by GSP, to measure revenue recognition performance versus target.
So, they are the benefits. But how do you manage revenue recognition in Salesforce?
Revenue Recognition using Product Schedules in Salesforce
Product schedules are the way to manage revenue recognition in Salesforce because they allow you to spread the revenue from opportunity products over time.
Creating schedules at the opportunity product (rather than opportunity) level means you can create different revenue recognition profiles for each source of revenue arising from a single deal.
For example, let’s say you sell a SaaS product on a twelve-month contract, plus professional services for training and setup.
There will be two products on the opportunity in Salesforce. The SaaS product will have a revenue recognition profile lasting twelve months. In contrast, the revenue recognition profile for the other product will last only for the month or two it takes you to deliver the professional services.
However, you lose this level of revenue recognition sophistication if you only create schedules at the opportunity level. That’s why you need opportunity product-level schedules.
Pro tip. The only exception to using product schedules is if you need advanced MRR or ARR metrics. In that case, I recommend you look at the Subscription Manager by GSP.
How to Create Product Schedules in Salesforce
You can enable users to create product schedules that support revenue recognition reporting in Salesforce in three ways.
Standard product schedules feature.
- Salesforce Billing and CPQ.
- Product Schedules by GSP app.
- Here’s my view on the three options.
Standard product schedules. The standard product schedules functionality hasn’t changed much since I began deploying Salesforce in 2003, and it’s challenging and cumbersome. For example, when the opportunity close date shifts, salespeople must drill into each product and manually adjust the schedules. They often don’t do this, so your revenue recognition report quickly becomes inaccurate. On the other hand, it’s a standard feature included with your Salesforce license fee.
Salesforce Billing and CPQ. The Salesforce Billing option is a credible solution if you have a large and complex operation with sophisticated product management and revenue recognition needs. Significant resources (human and financial) are necessary for successful implementation, along with robust project management and the discipline and willingness to re-engineer your processes. Many companies have successfully implemented Salesforce Billing and CPQ, but it’s not a journey you should embark on lightly.
Product Schedules by GSP. We built the GSP Product Schedules app to address the shortcomings of the standard functionality and provide a significantly lower-cost, straightforward alternative to Salesforce Billing and CPQ. The app makes it easy for salespeople to add and adjust product schedules and uses reports and dashboards to deliver visibility on revenue recognition forecasts and projections. We charge for the app on a per-user rather than per-company basis, with monthly and annual payment options available.
Next, let’s look at a straightforward revenue recognition example using a straight-line profile. Then, I’ll show you how to manage more complex revenue recognition scenarios.
Tracking Straight-line Revenue Recognition in Salesforce
Product Schedules by GSP enables salespeople to quickly and easily create the schedules needed for revenue recognition in Salesforce.
Here’s a summary of how the process works. Learn more on the dedicated Product Schedules app page.
Salespeople enter the schedule parameters when adding a product to the opportunity.
You can see in this example that there are twelve schedules for $1,000 over twelve months.
Scaling this up using reports and dashboards that span multiple opportunities delivers visibility of our overall revenue recognition.
For example, here’s the top row of the dashboard that comes built-in with the app.
Our revenue recognition for the year-to-date is $$701K, and you can view the monthly breakdown. The Year-to-Date earned revenue is $232K. Other charts show this information by product category, territory, and salesperson.
However, let’s look at pipeline revenue recognition.
The dashboard chart shows $229K in potential earned revenue this year. The underlying report shows this information by the product group and salesperson.
Of course, we can see the same information for each quarter or year. For example, here’s the revenue recognition chart for next year.
The chart shows revenue due to land next year from opportunities already won. In other words, the revenue recognition on some deals spans this year and next.
Improve forecasting by scheduling opportunity
revenue over time.
Tracking Complex Revenue Recognition in Salesforce
Some businesses have specific rules about how revenue is recognized, meaning the result is not always a straight line. More complex types of revenue recognition include:
- Free trial.
- Chargeable proof of concept.
- Reduced price or no-charge period.
- S-curve profile.
- Seasonal variations.
- Consumption-based.
Free Trial
A free trial usually precedes the completion of the sale. In other words, you can’t regard the deal as closed won because the customer hasn’t committed to signing the contract or paying for the service.
Therefore, for a free trial, you set the Close Date and Product Schedules Start Date for when the trial ends.
Of course, the trial gets extended sometimes. With Product Schedules by GSP, when you change the Close Date of a pipeline opportunity, the schedules automatically shift to the same number of days. This process keeps the revenue recognition report aligned with when the customer signs the contract.
Chargeable proof of concept
This method differs from a free trial because the customer pays a fee for the proof-of-concept. The best way to handle this is by using two different opportunities.
The first opportunity represents the sales process up to securing the proof-of-concept. The product schedules on this opportunity reflect the relatively short-term nature of the proof-of-concept.
You have a second opportunity that reflects the main deal. Potentially, this opportunity is created later, after it becomes apparent that a proof-of-concept is required to secure the deal. The product schedules reflect that PoC opportunity’s revenue recognition profile.
The primary opportunity stays open when you win the proof-of-concept deal. That’s because the customer hasn’t committed to the longer-term arrangement yet-it depends on the outcome of the proof-of-concept.
As a result, you have a combination of won schedules (i.e. revenue you can recognize) and pipeline schedules (potential revenue you cannot yet recognize) on the same account, albeit on two different opportunities. Winning the primary deal means recognizing the revenue on the second opportunity.
No charge period
This scenario is different to the free trial or proof of concept. It occurs when you are in a competitive situation and trying to persuade the customer to switch from an incumbent provider.
The customer is willing to move to your service before their contract with the existing provider ends. However, they don’t want to pay for both services simultaneously. That means you agree to a reduced or no-charge period until the customer’s contract expires.
To do this using Product Schedules by GSP, you set the Start Date of the schedules to begin at the commencement of the contract. However, you adjust the value of initial schedules to reflect the reduced charge or no-charge period.
Doing this aligns the revenue recognition report with the period the customer pays for the service.
S-curve revenue recognition
Companies that need to recognize revenue over an extended period often use an S-curve approach.
For example, major projects can take many years in the construction industry. The monthly income is relatively small during the early phases because the work centres on on-site preparation and planning. At the end of the project, the revenue is again relatively low because it’s mostly finishing off work that is underway.
In other words, significant revenue is earned in the middle period.
Using Product Schedules by GSP allows users to select different revenue recognition profiles, including an s-curve. This option automatically generates a revenue recognition profile based on the projected income from a long-term project.
Seasonal variations
Using Product Schedules by GSP allows users to select different revenue recognition profiles, including an s-curve. This option automatically generates a revenue recognition profile based on the projected income from a long-term project.
Several customers use this profile in the education sector, where there is significantly more revenue recognition from annual contracts during the spring and fall periods.
Like the S-curve, the product schedules automatically align with the revenue recognition profile, producing accurate earned income reports.
Consumption-based
Sometimes, the revenue recognition profile is unique to each customer. For example, delivering professional services on a project reflects the specific milestones and work patterns agreed upon by each customer.
The app enables salespeople to customize their revenue profiles easily.
As a result, the revenue recognition profile reflects the level of work and effort agreed with each customer.
Remember, you can visit the app page for Product Schedules by GSP to learn more or the Product Schedules AppExchange Listing for a free trial or test drive.
However, before we close, let’s talk about Billing Schedules.
How to Manage Billing Schedules in Salesforce
Earlier, we explained that Billing Schedules reflect when you invoice the customer, not when you can recognize the revenue.
We also said that the schedules that drive revenue recognition should be at the product level, not the opportunity level.
However, with billing schedules, you have a choice. You can specify the parameters that drive the billing schedules at the opportunity level or the opportunity product.
I recommend you define billing schedules at the opportunity level if the same billing frequency applies to all products. For example, all products will be invoiced quarterly or annually, not a mix of both.
A straightforward way to do this is by using a field on the opportunity to define the billing frequency.
There’s no standard billing schedule in Salesforce, so you’ll need a custom object.
When users populate this picklist, a flow automatically generates the billing schedules. Remember to tell the flow what to use as the start date for the billing schedules (the opportunity close date, for example) and to shift the schedules if the start date changes.
The result is a sequence of billing schedules linked to the opportunity and relevant products.
Get in touch if you need help creating the flow.
What To Do Next
After reading this comprehensive guide to managing revenue recognition in Salesforce, there are three things you can do now.
- Review Product Schedules by GSP. Visit the Product Schedules app page or AppExchange Listing to learn more.
- Get in touch. You can contact us with any questions about this blog post or to request a walkthrough of the Product Schedules app.
- Read a related blog post. For example, many companies that need to recognize revenue in Salesforce also do business using framework agreements. In that case, I recommend this blog post: How To Manage Framework Agreements in Salesforce.
Over to you.
Improve forecasting by scheduling opportunity
revenue over time.
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