Billing software turns contracts and usage into invoices; revenue recognition software turns the same contracts into revenue in the right period. They are sold together and separately, and the boundary between them is the line between what a customer owes and what a company has earned.
What it does
Billing systems hold the product catalog and price book, the customer's subscription or contract, and any metered usage. On each billing date they produce invoices, apply proration when a plan changes, call a tax engine, and pass invoices to payment collection. For subscription and usage-based businesses, billing is often the system of record for the customer relationship.
Revenue recognition follows the accounting standard. Under IFRS 15, which the IFRS Foundation notes was issued in May 2014 together with Topic 606 in the FASB's Accounting Standards Codification, a company identifies the performance obligations in a contract, sets the transaction price, allocates it to each obligation, and recognises revenue as each is satisfied. The SEC staff brought its own guidance into line with Topic 606 in Staff Accounting Bulletin No. 116. Software automates the allocation (using standalone selling prices), builds revenue schedules, handles contract modifications, and produces the journal entries and disclosures, including deferred revenue and remaining performance obligations.
Who uses it
Revenue accountants and the technical accounting team own recognition. Billing operations and finance operations run invoicing. Sales operations configures quotes and products where quoting is included. Auditors test the revenue schedules.
The parts a typical product has
- Product catalog, price book and plans, including usage and hybrid pricing
- Quoting and contract capture (CPQ), in some products
- Subscription management: upgrades, renewals, cancellations and proration
- Usage metering and rating
- Invoicing, payment collection and dunning
- Revenue allocation, standalone selling price and revenue schedules
- Journal entries, deferred revenue and disclosure reports
Where it meets other categories
Invoices hand off to accounts receivable for collection. Tax is computed by tax engines. Revenue entries post to the ERP and are reviewed at the close. Bookings and recurring revenue feed FP&A models.
Questions to ask a vendor
- Which pricing models do you support without custom code: usage, tiers, commitments, credits?
- Do you recognise revenue yourselves, or pass schedules to another system?
- How are contract modifications and standalone selling prices handled?
- Which CRMs and ledgers do you integrate with, and in which direction?
- What reports support the revenue disclosures in our financial statements?
- How do auditors trace a recognised amount back to the contract?