When customers reach out for recurring billing solutions, it’s usually to address specific issues. Pain points vary by department, but ultimately they’ve experienced challenges large enough to justify seeking a new billing method.
Subscription management and recurring billing software handles many facets of e-commerce and subscription businesses, including:
- automating the billing process
- resolving bottlenecks to launch products faster
- managing details for every subscriber
As you know, each department touches specific parts of the subscription ecosystem, which is often developed in-house. These homegrown or legacy systems are developed for a business by a coder, who simply figures out how to receive money. That person only focuses on one of the major accounting ledgers: cash.
However, the accounting department deals with the business in its entirety, including all expenses, assets, and liabilities. It has to focus on the cash ledger, but also highly volatile sales ledgers, including:
- accounts receivables
- write offs
- deferred revenue
- earned revenue
There are a few more ledgers involved in generating revenue, but the ones mentioned above are the “paper” of the business—these represent what is generating income.
This is already challenging for the accounting department of a traditional business. When you add in a recurring billing component, these ledgers go into overdrive. A traditional business may have 1,000 customers, and send out 1,000 invoices, but just once. But if that business generates revenue from monthly subscribers, those 1,000 invoices now have to be sent out every month, ad infinitum.
Major considerations for setting up recurring billing
When our onboarding team is working with a business during the transition period to comprehensive recurring billing software, we often work with several different department members. There are two significant considerations that businesses ask about:
1. What customers see and experience
This is what the marketing side of a business wants to know first and foremost. Marketing personnel, or “tuners”, have worked hard to brand a business’s products and services. They are responsible for ensuring that the branding remains consistent throughout all communications, especially if a third party steps in to manage recurring billing.
This includes invoices, receipts, email communications, registration pages, and self-service portals (SSPs) for customers. With a comprehensive recurring billing platform, branding is consistent throughout, down to the logo and lingo on an invoice.
Even email communication generated through dunning management must be tailored to keep the same branding. Dunning management emails can be set up by the business and automatically sent to communicate issues with a payment method, or remind customers in advance about a credit card that is set to expire. These stay on-brand with a robust subscription billing platform.
Historically, a business may have employed a homegrown system, a simple recurring payment processing service from a gateway, or a low-cost recurring billing service. While these different avenues may be able to address the needs of brand consistency, they fall short of what accountants expect and require at the end of each month.
2. What the accountant sees when they close the books
Accounting has many different needs, because the department touches so many facets of the business.
An accountant needs a recurring billing platform to speak their language.
By that, we mean the language of dual entry accounting: a system with corresponding credits and debits for each transaction. This is the universal language of accounting, and assures that everything stays in balance.
The dual entry platform distinguishes sales from collections, which is essential to separate with recurring billing. In recent history, revenue recognition has become a primary focal point to maintain GAAP (Generally Accepted Accounting Practices) compliance.
We’ll delve into that in a little bit, but first, let’s take a look at some of the primary pain points accountants have with recurring billing.
Accounting pain point #1: All financial transactions need to talk to their General Ledger (GL) system.
There are several accounting systems a business may utilize, including QuickBooks Online (QBO), NetSuite, Xero, Great Plains, Oracle, etc. Basically, any accountant has the same requirement: the transactions that move all of those ledgers need to be in the accounting systems.
Without a solid recurring billing platform, this means manual entry. As humans, we are 60% accurate. We’d like to think we are less error-prone, but the cold, hard truth is that if humans are responsible for inputting all billing transactions into an accounting system, mistakes—and often costly ones—are going to be made.
As a business grows, those errors are only going to become more prevalent.
Because not only is manual entry error-prone, but as more demands are placed on a growing business’s billing department, people are more likely to deal with the growing volume by taking shortcuts.
And in the accounting world, shortcuts is a profane word.
For example, shortcuts may be in the form of:
- processing all transactions under a singular billing entity
- combining transactions in order to reduce volume
These shortcuts compromise the audit trail, or lose it altogether. For accountants, this is devastating. A lengthy paper trail explaining changes on an invoice from 3 years back is better than having that invoice deleted or merged with other transactions.
If accountants lose the audit trail in their accounting system, they can’t prove their numbers. That’s not just an accounting headache; it’s a full-blown migraine.
However, a robust recurring billing platform can easily manage every customer, every invoice, and every transaction. It can push all the information into the accounting platform of choice without the costly errors of manual entry.
Accounting pain point #2: Accountants need their recurring billing processing to meet them where they’re at.
As mentioned above, accountants speak the language of dual entry accounting. What this means is that not every payment made is cash, per se. A payment needs to be put into two different categories: corresponding offsetting debits and credits.
Sales must be recorded as Accounts Receivables (AR), and those payments need to draw down from the balance on customers. The customer’s “balance” actually means the remaining AR on that customer. You think of your balance at a bank as cash on hand, right? That’s not entirely true, however; your balance is actually money the bank owes you.
Using a subscription business as an example, then, when a customer has a $10/month subscription, the business actually owes the customer $10 per month. This is typically paid back in product or service, but it’s an important differentiation. Reversals and refunds need to be processed as separate ledger entries. Charges can be reversed, while payments are refunded.
After making a payment, if the customer decides to cancel the subscription, a business actually has to do two things.
- They might give the money back to the credit card, which is a refund.
- They also have to go in and reverse the charge to indicate that the customer doesn’t owe $10 every future month.
Accounting pain point #3: When is revenue recognized in accordance with GAAP?
A big challenge for service businesses is recording revenue when value is delivered. A business that provides services charges a customer up front with the agreement that they have access to the service, usually for a week, month, quarter, or year.
According to GAAP’s ASC 606 revenue recognition standard, a subscription business cannot record revenue until the value is delivered. Revenue recognition breaks payments into deferred and earned, or recognized, revenue.
In the case of the $10 monthly subscription example we used earlier, that full $10 cannot be recognized as revenue on the first day of the billing period. Instead, $.33 is recognized each day for the duration of the period. So, on day 15, $4.95 will be earned revenue, while $5.05 remains deferred revenue.
There are often adjustments within the process. There may be:
- free trial periods
- upgrades (when a customer adds features or services)
- downgrades (when a customer removes features or services)
A billing system has to keep up with all those adjustments in real-time. Again, if this is left to manual entry, extrapolating the process with changes will likely result in incorrect revenue recognition.
When revenue recognition is calculated correctly, there is no remaining deferred revenue at the end of every month/quarter/year when the accountants close their books.
Recurring billing software streamlines the process and frees revenue recognition from errors. By implementing this software, accountants can close their books in a matter of hours, not days.
Unfortunately, many recurring billing platforms are not built using dual entry accounting, so they do not speak the language fluently.
From its inception, Stax Bill was designed and built by accountants, creating a platform in the desired dual entry language. By streamlining information into accounting-friendly data, the platform easily pushes out critical information to other accounting systems. This improves both accuracy and efficiency.
Finally, a recurring billing platform should have powerful revenue recognition modules. This allows accountants to configure and report on revenue recognition at any moment within the billing period.
Deciding to use a recurring billing system can initially cause angst for a subscription business. The right partnership between a subscription business and billing platform, however, addresses the needs of key members, such as accountants. Proper implementation will ensure robust, efficient, and powerful monetization of products, services, and features so a business can achieve predictable recurring revenue for years to come.
FAQs about Pain Points of Recurring Billing
Q: What are the common pain points of recurring billing?
Recurring billing often presents various challenges for businesses such as managing detailed records for every subscriber, automating the billing process, handling numerous sales ledgers, maintaining consistency in branding throughout all communications, minimizing errors in manual entry, and complying with revenue recognition standards.
Q: Why is a comprehensive recurring billing platform important in addressing these pain points?
A comprehensive recurring billing platform is crucial as it offers solutions like automated billing, detailed record-keeping for every subscriber, and an efficient system for managing multiple sales ledgers. It also helps in maintaining brand consistency across all communications, minimizing errors resulting from manual entries, and adhering to revenue recognition norms.
Q: How does a recurring billing platform help in maintaining brand consistency?
A recurring billing platform enables a business to consistently display its branding across all communications including invoices, receipts, email communications, and registration pages. It ensures that even email communications generated through dunning management adhere to the same branding.
Q: What is the significance of dual entry accounting in relation to recurring billing platforms?
Dual entry accounting is essential in regard to recurring billing platforms as it separates sales from collections. It enables corresponding credits and debits for each transaction, ensuring everything stays balanced.
Q: What is revenue recognition and how does it relate to recurring billing?
Revenue recognition is a GAAP-compliant method that takes into account the value delivery rather than mere payments. A business cannot record revenue until the value is delivered, hence breaking payments into deferred and earned revenue. A recurring billing platform helps in error-free revenue recognition, even with real-time adjustments such as discounts, upgrades, or cancellations.
Q: How can recurring billing impact a traditional business’s account management?
In businesses that generate revenue from monthly subscribers, invoices have to be sent out each month, thereby increasing the complexity of account management. A recurring billing platform can efficiently and accurately manage every customer, every invoice, and every transaction, significantly improving the company’s overall revenue management.
Q: What are some top-rated recurring billing software?
Some of the highly-rated recurring billing software in the market include Chargebee, Stripe Billing, PaySimple, Recurly, and Stax Bill. These platforms offer a variety of features, such as automation of billing processes, simplified invoicing operations, and powerful revenue recognition modules, to help businesses manage their recurring billing efficiently.
Q: How does Stax Bill stand out as a recurring billing platform?
Stax Bill is designed and built by accountants, providing a platform in the dual entry language that accountants prefer. It streamlines information into accounting-friendly data, improving both the accuracy and efficiency of accounting operations. It also has powerful revenue recognition modules allowing accountants to configure and report revenue recognition at any moment within the billing period.
Q: Can a recurring billing platform assist in maintaining GAAP compliance?
Yes, a robust recurring billing platform can assist businesses in complying with GAAP (Generally Accepted Accounting Practices). It enables accurate revenue recognition in line with the ASC 606 revenue recognition standard mandated by GAAP, which is critical in subscription businesses.
Q: What is the role of a recurring billing platform in relation to revenue recognition?
In terms of revenue recognition, a recurring billing platform breaks payments into deferred and earned, or recognized, revenue. For instance, in a $10 monthly subscription, that full $10 cannot be recognized as revenue on the first day of the billing period. Instead, a portion of it is recognized each day for the duration of the period. At any point in the billing cycle, an efficient recurring billing software should be able to accurately calculate and report the amount of earned and deferred revenue.