What you need to know about Revenue Recognition when implementing an Order Management System (OMS)

What are some key considerations when considering implementing a new OMS and CRM? One area that is often overlooked is Revenue Recognition. Revenue recognition is intrinsic to all business areas and should, as such, be at the forefront of the design and requirements.

First, you need to understand your revenue recognition rules and criteria. Once you understand them, they must be clearly expressed as fundamental to the design requirements. It is surprising how often this is not clearly defined until the reporting stage of analysis, and of course, that is then probably too late!

You need to think about how that sales data will be represented financially and, in turn, how that will affect your design. Revenue recognition affects how you view your pipeline and your sales forecasts and how they transition from a quote state to a booked state, so understanding how you want that data represented is a key factor in delivering a successful solution.

Challenges of Revenue Recognition within the Media Industry

Within the media industry, revenue recognition provides some specific challenges that need to be considered in the design, while other considerations are shared across industry verticals:

• Complexity of Digital Orders: Calculating revenue recognition for digital orders poses a unique set of challenges. When prices are based on unknown factors like actual delivered amounts (e.g., impressions, clicks), it becomes significantly more challenging to determine the correct revenue to recognize. The OMS must be capable of accounting for both the contracted and actual value delivered, which can fluctuate throughout the order’s duration.
• Reconciling with Manual Processes: Many companies still rely on manual processes and Excel spreadsheets for revenue recognition. Integrating these often disparate and outdated systems with a modern, automated revenue recognition solution can be complex and require significant data migration and system reconciliation efforts.
• Lack of Agility in Existing Systems: Traditional OMS often lack the agility and real-time data insights needed for effective revenue recognition. Integrating a new OMS/CRM that considers revenue recognition may require significant modifications to existing systems or even a complete overhaul to ensure seamless data flow and real-time reporting capabilities.
• Configuration Complexity: The rules governing revenue recognition are intricate and vary significantly across businesses. Configuring the OMS to align with these specific rules, including how production charges are allocated, discounts are applied, and free-of-charge items are handled, will need detailed thought and analysis.
• Handling Historical Data: One significant challenge is incorporating historical data into the design. Historical revenue data must be accounted for within the newly integrated system to ensure an accurate year-on-year comparison of financial performance. Failure to do so can lead to discrepancies and inaccuracies in financial reporting and will prevent year-on-year analysis.

Considerations to be Considered

Considering the above, some key nuances must be considered when implementing a new Order Management System (OMS). Neglecting these can lead to inaccurate data-driven decisions with unfavorable consequences for various business aspects.

Here’s why:

• Accurate Revenue Calculations for Decision-Making: OMS systems need to accurately calculate revenue from orders and order lines to provide data for sound business decisions. It’s crucial to understand that revenue calculation methods vary across businesses. The OMS should be flexible and align with the business’s specific requirements. For example, revenue for print orders should be attributed to the month the magazine is released. Digital orders spanning multiple months require apportioning revenue across those months based on duration.
• Addressing Complex Revenue Recognition Scenarios: Revenue recognition can be complex, particularly in media businesses with diverse revenue streams like advertising, subscriptions, and content licensing. An OMS needs to handle various scenarios:
• Multi-Component Transactions: It can be challenging to accurately separate and measure revenue for bundled packages that include hardware, software, consulting, and other services.
• Multi-Year Transactions: Careful consideration must be given to determining when and how much revenue to recognize for long-term projects with fixed fees, uneven cash flows, and multiple deadlines.
• Contracts with Unknown Factors: Digital media often involves contracts whose final price depends on actuals, like the number of impressions delivered, making revenue calculation more complex.
• Ensuring Compliance and Transparency: Revenue recognition standards like IFRS 15 exist to promote transparency and reduce manipulative accounting practices. Integrating revenue recognition into the OMS from the outset ensures compliance with these standards and fosters stakeholder trust.

Consequences of Ignoring Revenue Recognition

• Inaccurate financial reporting leads to misinformed decision-making and potential legal and regulatory issues.
• Loss of stakeholder confidence due to unreliable financial data.
• Missed opportunities for growth and profitability due to an inability to respond proactively to market dynamics.

Benefits of Prioritizing Revenue Recognition

• Make data-driven decisions based on real-time revenue insights.
• Gain a competitive edge by responding quickly to market changes and customer preferences.
• Improve financial planning, budgeting, and investment evaluations.
• Enhance agility and responsiveness within the business.
• Build trust and confidence among stakeholders, including investors, management, and sales teams.

Originally posted on ADvendio.com on the 9th of December 2024.