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Coming up with a game plan for revenue recognition

Consider taking the new revenue recognition rules out for a spin. It could be a short test drive, with just a sample of current contracts sitting in the passenger seat so you can see how the changes feel and how drastic they may or may not be to your company.

The point is to explore the impact of the new rules and determine if any of your processes, systems and contracts need to be adjusted before the rules go into effect. It’s much easier to consider the changes now than when a deadline is staring you in the face. That was the overriding theme of a recent Proformative.com webinar called “Revenue Recognition in 2015: What Your Company Needs to Get Done” with speakers Steve Jackson, a senior consultant at RoseRyan, and Mike O’Brien, General Manager, Financial Management Applications, at FinancialForce.com, a cloud ERP provider on the Salesforce1 Platform.

Changing your view of revenue
It’s been nearly a year since standard-setters released the new rules last May. Since then, companies have, at the very least, digested the literature (if not, it’s time to get cracking!), but what they’ve done next varies. Some have pressed the Financial Accounting Standards Board to make tweaks and give companies more time to adopt the standard while others are moving full speed ahead and are exploring the impacts.

During the Proformative event, several hundred attendees were polled on their plans. Just 15% of the webinar attendees said they have a plan in place to deal with the new rules while 35% said they’re still mulling over the guidance and observing what other companies are doing. “For those of you who are early in the process or don’t know what to do yet, don’t fear, you are not alone,” O’Brien said. “I talk to a lot of customers every day, and some are further down the line, but in fact some companies haven’t fully embraced the standards from a systems perspective.”

As expected with a rule of this size and significance, FASB and the International Accounting Standards Board are hearing about implementation issues and considering whether to clarify anything (most recently, FASB agreed to propose an update that would make clearer how to account for licenses of intellectual property and identify performance obligations).

We’ll all have to stay tuned. Under the current timeline, public companies’ financial statements won’t reflect the changes until 2017 (beginning with reporting periods that start after December 15, 2016; private companies get an extra year). Finance and accounting teams need the time between now and then to get a grip on potential impacts, prepare their systems for the changes, and give investors a head’s up for any shift in financial results.

One way to truly understand the impact? “Go through the motions of closing a month as if the new rules were in effect now,” Jackson suggested. “It’s important that you try to understand the impact so you’ll know what you’re dealing with when building your full plan,” he said.

For those 2017 reports, public companies will be showing three years worth of comparative information, “so activity that is taking place now will be part of the financial presentation” in that first year, Jackson noted.

Where to begin
Jackson recommended viewing the adoption as you would a big tech system upgrade or an acquisition of another company. Like those big projects, you need to do your homework, put a team in place to tackle it and hatch a plan. For some companies, Jackson explained, the work may involve a just few people while others will need to supplement their skillsets with outside resources.

Ideally, the person spearheading the endeavor should have strong project management and communication skills. “As you implement the new standard, your revenue could be different in 2017,” Jackson said. “So as you forecast to shareholders and analysts what you believe revenue and earnings per share are going to be, that needs to be incorporated.”

To get to that point, companies should take these actions:

  • Come up with an overall plan and calendar. Treat it like a big project, which it is.
  • Formulate your team and make sure all other relevant departments are involved. Some companies may need to include sales, IT, human resources (if any compensation plans are tied to revenue), legal, tax, investor relations. Also consider getting other executives, the audit committee and external auditors up to speed with your plans and evaluations.
  • Manage your investor communications. Give outside observers a sense of the potential impact. So far, as required under the new rules, public companies are hinting at how the new standard will affect them. They have either said, in general terms, that it could have a significant impact on their financial statements or won’t have a material impact.
  • Check all your financial systems to see if they can accommodate the changes and what your vendors have planned. “You don’t want to switch on new software the first day of the reporting quarter,” O’Brien said. “If your vendor doesn’t plan to comply or make the application available to you, you need to know now.”

The overall message? It is best to plan ahead. Not every company will be deeply affected by the new changes, but every company should be considering the level of impact at this time.

Watch the replay “Revenue Recognition in 2015: What Your Company Needs to Get Done,” which took place on Proformative.com, a website for senior finance executives.

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The 4 stages of the business lifecycle and how to recognize what you need next

Many companies tend to follow similar patterns as they adapt and change over time. The trajectory is known as the business lifecycle, and we’ve identified four particular stages that companies typically move through from beginning to maturity. Knowing where a company lies along the lifecycle is critical for truly understanding its current and future finance needs.

Like humans, businesses have a growth track they follow as well as a constant pull to reevaluate who they are and where they’re going. As companies grow from the small-business stage and expand and evolve into fully fledged ongoing enterprises, they have to adjust to increasing demands and the rapid pace of change around them. And they need to constantly reinvent themselves to stay competitive.

With all these points in mind, we constructed our view of the stages of the typical business lifecycle and the different finance challenges that occur at each stage. Is there a pressing need for a huge ramp-up? Could an IPO give the company the boost it needs, or will it remain private indefinitely? Companies go through existential crises all the time, from startups cobbling together basic funds and a tight team, to large public companies facing pressures at a global level. The lifecycle is a useful map for the potential future journey of a company, and can help evaluate whether the finance team’s resources can keep up with all the changes and demands.

Here is our take on the four stages of the business lifecycle:

Start: The first stage of growth involves balancing the fight for survival with getting the small business up and running. It’s just a few employees forming a solid team, gathering funds together and developing a sellable product at warp speed. Many startup companies haven’t gotten around to setting up their financial infrastructure yet. They may need to lean on outside sources before they bring on full-timers.

Grow: This is the time of building the business rapidly to scale. It’s all about managing high growth on this rollercoaster, and potentially chaotic financial messes. Many companies need to rapidly set into place new organized processes and systems to get their financial house in shape and ready for the prying eyes of investors, auditors and potential acquirers.

Expand: Here is when companies move on to a whole new strategy for growth and it usually involves a big transaction. They may buy another company, merge or go for an IPO. What’s missing at this stage at times is a plan for traveling through it and getting through the aftermath. Most companies underestimate the work and amount of change involved.

Evolve: At the fourth stage, the mark of maturity, ongoing businesses hit a barrage of change at every turn, from high pressure by competitors, investors and customers to unpredictable business crises. They frequently need to reinvent themselves to stay a winner.

What keeps companies in motion? It won’t surprise you to hear that I believe the success of any company rides a lot on the strength of its finance team. With a solid financial infrastructure in place and access to just the right talent at the right time, the company can keep humming and stay on top of all the requirements. By having a strong financial backbone, with efficient systems and processes, companies can focus on strategic changes that will push the business forward. Those are the ones best poised for success.

At RoseRyan, we reflect upon each client and where they are in the business lifecycle, to best anticipate what services they might need most. Companies appreciate our experience—having helped hundreds of companies through each stage—and trust us to get them through it quickly.

For more about how RoseRyan helps across the lifecycle, go here.

Kathy Ryan is the CEO and CFO of RoseRyan. Since co-founding the firm in 1993, she has served as interim CFO at more than 50 companies.

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