The Finance Guide to Managing Services-Based Business Models

Managing finance for new services models

The digital economy and the rise of everything-as-a-service (XaaS) business models have fundamentally changed how we sell, implement, monetize, account for, and serve our customers. In turn, these fundamental changes have fueled the need for more modern front and back office systems designed for digital, service-centric businesses. Lacking the proper systems and strategies is increasingly a big risk: Many companies have yet to fully adapt, calling into question whether they can support new services-related revenue.

To do their jobs well in the XaaS economy, chief financial officers (CFOs) and other finance leaders need a comprehensive view into their customer accounts. But acquiring that visibility requires a single platform underlying the front office CRM and back office ERP. With that underlying platform in place, businesses only need to maintain one customer database and finance teams can manage every revenue stream in a single place. From opportunity to renewal, CFOs need a solution in place that allows them to automate accounting, revenue management, and billing functions, enabling their teams to execute profitably, recognize revenue sooner, and earn customers for life.

Let's explore what every finance leader needs to know about managing services-based business models, and identify how modern ERP helps.

Record customer contracts and recognize revenue under ASC 606 and IFRS 15

By now, finance leaders should be well-versed in ASC 606 and IFRS 15, the latest revenue recognition standards for contracts with customers. But many underestimate the effort to adjust policies and design new processes to be compliant. As defined by the Financial Accounting Standards Board (FASB):

“The core principle of the new revenue recognition standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

From the services model perspective, companies must match a range of performance obligations to revenue. A practical example of where an organization would not be compliant is charging somebody $0 for a widget and $100 for the services (enabled by the widget) but not recognizing that the widget delivers revenue.

If you don’t have processes and solutions in place that support a service-based revenue model, then you could be in trouble. The required approach to dealing with new standards can be broken down into five key steps:

  1. Identify the contract(s) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfied the performance obligations.

We don’t expect a major impact to companies as a result of applying step 1 of the new revenue recognition model. But when transitioning from ASC 605 / SAB 104 to ASC 606, companies need to undergo a review of their sales contracts to ensure that they are legally enforceable.

The CFO Guide to Revenue Recognition

Review the 3 major challenges for companies seeking compliance
with the new standards—and reveal the opportunity in the challenge.

Establish healthy customer relationships through easy billing

Nothing aggravates a customer more than an errant bill, or getting billed for something they didn’t buy. Your company credibility, which takes so long to establish during the marketing and sales cycle, can vanish in a moment.

Billing discrepancies typically occur when companies use disconnected systems to manage multiple revenue streams. When invoicing is disconnected from CRM, the chance of invoice errors increases, especially in situations involving a large volume of customers or invoices. Even worse, when accounting and finance occur separately from CRM activities, your company can appear to be uncoordinated, unprofessional, and lacking in basic communication skills — all of which damage customer satisfaction and your ongoing sales efforts. When CRM and ERP are connected, on the other hand, not only is the billing process streamlined and automated but the chance of errors occurring is drastically minimized.

FinancialForce gives us one source of truth on the Salesforce platform. We needed a solution to effectively manage hundreds of global agents and thousands of invoices. We have that with FinancialForce.”


SHAUN DE LACY
DIRECTOR, GLOBAL FINANCE SYSTEMS AND OPERATION, INTO UNIVERSITY PARTNERSHIPS

Know customer costs to improve business strategies

One of the biggest reasons startups die and growing companies slow down is due to unbalanced customer acquisition costs (CAC) and customer lifetime value (CLTV). And it’s the finance team that can best gather that data. Answering these three simple questions is key:

  • What does it cost your business to acquire a new customer (CAC)?
  • What is your average customer’s lifetime value (CLTV)?
  • What are your churn rates?

If you can answer these questions, then you can identify at-risk areas of the business, advise new business strategies, and reallocate resources. It is expensive and resource-intensive to acquire new customers: The cost of acquiring a new customer is typically up to five times greater than the cost of retaining an existing customer. Increasing your CLTV means maximizing your monetary return from existing customers, making it highly profitable to invest in improving customer satisfaction. With the right systems and tools in place, CFOs and their teams can do a better job of balancing CAC and CLTV, strengthening the business.

Well-balanced business model

Customer success is essential to a services business—and finance is essential to customer success.

This shift to services and subscription renewals places tremendous emphasis on customer experience, making it critical that CFOs engage more deeply in customer satisfaction and product development. To achieve this greater understanding of customer experience, finance leaders must collaborate more closely with post-sales functions, including customer onboarding, service delivery, and customer support.

Ideally, CFOs and their teams should have clear visibility into all aspects of the customer journey, including:

  • Opportunities
  • Onboarding and implementation projects
  • Contracts
  • Billing and collections history
  • Support cases
  • Customer conversations
  • Quotes and proposals
  • Customer documentation

The finance leaders that do this well will gain greater levels of insight into customer behavior, service quality, and product quality. And that knowledge will empower them to grow the business.

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