Best Practices in Revenue Reporting
EXECUTIVE SUMMARY
RevenueRecognition.com in association with International Data Corporation (IDC) recently surveyed 578 business leaders about the need for improvements in their finance processes, with a focus on revenue recognition and related reporting processes. The survey was conducted in July 2007 by email and all responses were on an anonymous basis. More than 80% of respondents are CFOs, Controllers, senior finance executives, internal auditors, or compliance leaders. 110 responses were from companies with revenues of $1 billion or more. References to the data and narrative in this report should be sourced:
www.RevenueRecognition.com and IDC, 2007
Key Findings:
- 57% of public companies cannot finalize their revenue numbers within their monthly close process.
- Delays of up to three weeks are primarily caused by:
- Increasingly complex transactions
- Required information is not available in time
- The finance processes that are most difficult to establish internal controls for are contract management and revenue recognition.
- The two greatest challenges to ensuring revenue policies are
implemented accurately and consistently are:
- Managing accounting practices at multiple business units, divisions, and regional operations
- Spreadsheets
- Two-thirds of companies produce generalized revenue forecasts based largely on their sales pipelineas opposed to evaluating the actual revenue impact of current and proposed business.
REPORTING REVENUE
In our last survey, 92% of respondents indicated they use
spreadsheets to manually process their revenue data. This is
largely because revenue numbers are generated by analyzing
delivered goods and services against contractual terms and
that typically means getting at information buried in a multitude
of systems such as ordering, contract management, shipping,
billing, service tracking, etc. Once the data is collected,
accounting guidelines must be properly applied to different line
items depending on the nature of the goods and services.
In our latest findings, we measured the impact this has on revenue reporting processes and the news is not particularly good. As Figure 1 shows, only 43% of public companies in our survey are able to finalize their revenue numbers within their normal monthly close process. 57% spend up to three weeks on further analysis and uncovering corrections or adjustments to their revenue numbers after the books were officially closed.
REVENUE PROCESSING DELAYS
The time required to review complex transactions to ensure
the proper accounting treatments are applied is the number one
reason revenue data is not finalized during the normal close
process. As Figure 2 shows, this tends to be more of a problem
for larger companies, and in certain industries the problem is
acute. Over 50% of respondents from computer hardware and
software manufacturers and utilities companies ranked this as
the number one issue. The second problem is having the right
information at the right time. More than 40% or more of
respondents from computer hardware, financial services,
healthcare services, and transportation companies ranked this
number one.
THE REVENUE POLICY CHALLENGE
Transaction complexity is only part of the story. Transactions take place at many locations and at many different levels in a large enterprise. The revenue policy is supposed to be the internal standard for decision-making. But as Figure 3 illustrates, managing accounting practices at local business units, divisions, and regional offices and the use of spreadsheets make it difficult to ensure that the revenue policy is implemented accurately and consistently.
The evidence makes it clear that companies lack an enterprise system to control their revenue processes. However, the absence of such a system is not considered a key challenge as disparate systems across business entities are the norm in most companies, and adjustments for accounting treatment have always been a manual process. In our last survey, 84% of companies that thought ERP systems processed all their revenue data reported that they actually used spreadsheets for key revenue related tasks. The implication is management teams are not aware of the limitations of ERP systems in this area, and accounting staffs may be unaware of solutions that are available.
