The definition of the word “revenue” has been firm pretty much forever (as the total income produced by a given source or the gross income returned by an investment). Yet revenue planning has been radically transformed recently.
Twenty years ago, most businesses built revenue through one-time transactions or with perpetual licenses. Customer life cycles were tough to manage, and income hard to predict. Today, there’s been an explosion of potential revenue models, including subscriptions, service fees, freemium memberships, usage-based billing, and recurring revenue. One-time transactions still exist, of course, but increasingly more businesses have long-term relationships with their customers, and they can predict or forecast at least a portion of their revenue into the future.
More variables have combined with greater uncertainty and acceleration in the business environment. This means strong and effective revenue planning is now more important than ever. “As a CFO, adding recurring revenue to a business may seem like a slam dunk,” proclaimed Tom Dibble, CEO of Aria Systems, in a popular CFO.com article from a few years back. But “the CFO has to constantly measure to determine if the model the company is using works, or if it should recalibrate to master changing market conditions.” And it is the finance team—and the strength of its revenue planning process—that will be called upon to help guide that decision.
Does the thought of revenue planning make you groan more often than grin? Consider these common pain points—and advice on how to ease the pain.
Pain point: Bottlenecks abound
If you’re using spreadsheets or multiple nonintegrated databases to track and plan company revenue, you already know what a hassle that coordination can be. The finance team is likely dependent on the sales department to collect and manually update its records, which can take a back seat to other tasks the sales force prioritizes. Getting that data from the sales tracking and projections software—and then verifying that any financials, especially sales forecasts, are an accurate rather than optimistic reporting—can take considerable time. And if the C-suite has a question or makes a request, winding through the manual process to import, verify, and then analyze can considerably slow down answers.
No wonder, then, that collaborating across departments is seen as a major weak spot by many CFOS: In an Adaptive Insights CFO Indicator report, 45% of CFOs said the FP&A team’s ability to collaborate across the business was a top skill they’d hope to improve in order to become more effective. It ranked No. 2 only to improving analytical skills, which earned just one percentage point more.
Advice: Invest in a cloud-based solution that works seamlessly with your internal databases, such as Salesforce Analytics. When your sales software and revenue planning tool are integrated, there’s no lag accessing the information—and no bottleneck as the finance team tries to sift through one data silo and input its data into another. Instead, revenue metrics are updated seamlessly and without delay. This also guarantees greater accuracy, because you don’t have to sweat that someone transposed numbers or made a typo while manually inputting numbers. There’s no manual entry to speak of!
Pain point: Agility feels arduous
We get it. You’re stuck behind a spreadsheet, having coordinated with two or three different departments to get the latest crop of data inputted into your revenue forecast. Then someone asks what this year’s revenue might look like if the company doubled headcount in the sales department or slowed the launch of that next subscription offering. Or you get the latest sales report and see the estimated forecast sales for this quarter are dramatically over or under what the team had predicted. Cue the time delay.
While almost everyone in today’s business environment understands the need for organizational agility, FP&A teams are still struggling to put that ideal into practice. Nearly 80% of CFOs say major business decisions have been delayed at their companies because stakeholders didn’t have access to the necessary data in a timely manner, according to another Adaptive Insights CFO Indicator report. And in the same report, 60% of CFOs reported that ad hoc analysis, such as modeling what impact a potential scenario might have on the revenue plan, often took as long as five days. The amount of time those CFOs would like to see that analysis take is one day. Clearly, there’s a big gap between the current ability of finance agile teams to do revenue planning and scenario modeling, and the level of agility needed of them.
Advice: Finance leaders report that drivers enable greater revenue planning flexibility—including the ability to model what-if scenarios; perform product, service-line, channel, and customer profitability analysis; and deliver real-time updates. (Yes, profit margins should be calculated below the product or service-line gross profit margin.) For those not familiar, driver-based planning is an approach that focuses on a limited number of KPIs and drivers that can actually move the needle on business performance. It’s especially valuable for today’s fast-moving businesses, when revenue planning needs to move from a static business process to an active one. For this approach to work, finance leaders define the company’s major drivers and their unit-level cost consumption rates, get departments speaking a common language about those drivers, and then implement performance monitoring. When the sales volume and mix and their associated profits fall short of expectations or there’s an opportunity or threat emerging in the competitive landscape, the company is then better positioned to respond with agility. That’s because scenario planning is faster and more accurate, with everyone trained on the metrics that truly matter to business success.
Pain point: Revenue recognition is tough
In traditional businesses, for example, when you sell $10 worth of goods, you record it as $10 worth of revenue. But if you’re at a company where the revenue model is less straightforward, revenue recognition can get incredibly complicated. You might be juggling multiple revenue types as well as differences in contract terms or delivery terms. Spreading and amortization can be a factor, as can sales commission and conversion assumptions. If the finance team is manually entering all of that information, it can be a time-intensive and error-prone task. And if the company has global markets or hopes to expand abroad with currency rate fluctuations, then regulatory requirements around when and how to recognize that revenue can make the task even more complicated.
Advice: Having the right revenue recognition rules in place is an absolute must, so executives can get a clear-eyed view of the company’s future. But automation should go hand in hand with those rules. That’s because finance teams who are stuck using spreadsheets or clunky legacy systems operate at a lag: They have to wait not just for the numbers to happen, but for that info to get inputted, possibly verified, and then crunched into actionable insights. With automation in your corner, the team can establish rev rec rules and then watch them get applied to revenue streams in real time. Insights and updates to the revenue plan can happen in lockstep, making it easier for the company to course-correct if needed and avoid unwanted variances down the road.
Your company needs to answer questions such as, Which type of customers are more attractive to retain, grow, win back, or acquire, and which types are not? You need fact-based information, because in the absence of facts anybody’s opinion is a good one.