What is Automated Revenue Management?

The definition of Automated Revenue Management

Automated Revenue Management (ARM) involves using software and technology to streamline and optimize the revenue management process within an organization. This can include tasks such as:

•           - Tracking and recording customer contracts
•           - Tracking and recording income from various sources
•           - Managing accounts receivable and invoicing
•           - Identifying trends and opportunities to increase revenue
  •           - Automating revenue recognition and reporting in compliance with accounting                      standards
    •           - Providing real-time visibility into revenue performance

ARM aims to enhance revenue management efficiency and accuracy, minimize manual errors, and offer insights to facilitate business expansion. It is commonly utilized in industries with intricate revenue streams, such as software as a service (SaaS) companies, subscription-based businesses, and companies with multiple revenue models.

Application within an Accounting Team

The revenue management function is a complex subset of accounting activities that is traditionally the most challenging and time-consuming area for accounting teams. It is comprised of numerous individual tasks that are innately complex. In addition, the function requires uncompromising commitment and dedication to ensure accuracy, integrity, and timeliness.

The individual revenue management tasks are completed on a routine and recurring basis (daily, weekly, monthly, etc.). These tasks require a consistent process for data collection, processes, and output creation. The individual revenue management tasks include the following:

•           - Maintenance and management of Product & Services Information
•           - Extraction and tracking of customer contract data
•           - Invoice creation and distribution to clients
•           - Creation of Revenue Recognition calculation and schedules
•           - Management of Accounts Receivable, Collections, and Payment applications
•           - Overage calculations and processing
•           - Month-end journal entries

Application of Accounting Standards

Revenue recognition activities must be compliant with GAAP standards and best practices. In the US, Revenue Recognition adheres to ASC 606 (defined by FASB) and IFRS 15 (defined by IASB) in Europe.

As defined in ASC 606, FASB defined a 5-step model for entities to determine the appropriate amount and timing of revenue recognition and is as follows:

•           1. Identify the contract with a customer.
•            2. Identify the performance obligations in the contract.
•            3. Determine the transaction price.
•            4. Allocate the transaction price to the performance obligations in the contract.
•            5. Recognize revenue when, or as, the entity satisfies a performance obligation.

Further, if a contract has multiple performance obligations, ASC 606 requires the entity to allocate the transaction price among the performance obligations based on relative standalone selling price (SSP). The SSP is the price at which an entity would sell a product or service separately to a customer, the “directly observable price.” If a standalone selling price is not directly observable, the entity shall estimate the SSP, with suitable methods being defined as:

• •                1. Adjusted market assessment approach
•                  2. Expected cost plus margin approach
•                  3. Residual approach

Process and Systems

Before the activity can be completed, each revenue management task requires an accounting team to obtain and understand all the necessary input data, objects, and information. Data required to complete the task is collected in collaboration with sales, customer success, engineering, and product development throughout the revenue management cycle.

The accounting team will establish methods and processes based on GAAP standards and utilize available resources and tools to ensure accuracy and consistency. Historically, these tools have included:

•           1. Excel spreadsheets (completely manual activity required and inexpensive)
•           2. Standalone solutions (medium-to-high level of manual activity requirements and                  moderate expense)
•           3. Integrated ERP/GL solutions (medium-to-high level of manual activity                                requirements and significantly expensive).  

As is identified above, the level of efficiency and cost varies depending on the tool.

Benefits of Automated Revenue Management

When done correctly, the revenue management function will provide:

•           - Timely organic cash flow
•           - Timely completion of month-end entries
•           - Accurate financial statements are made in compliance with recognition standards
•           - Consistency and comparability of financial reporting across companies and                           industries
•           - Demonstratable integrity for internal processes, records, and internal controls
•           - Provide a cross-departmental and uniquely valuable dataset that can be leveraged               for insights otherwise unavailable to a company