Now that we’ve outlined the revenue recognition steps from the accounting standpoint, there are many opportunities for e-commerce companies to assess their operations and make improvements to bring added transparency and efficiency to their businesses.
Having an inventory of contracts to review provides useful information for management. It provides insight into the most sought-after products and services from clients and helps drive future growth strategies. If a company’s data shows that its customers are most interested in 12-month instead of 24-month contracts (example: purchasing an iPhone 12 from Verizon on a 24-month service contract), this is helpful for salespeople looking to offer services most demanded by customers.
An added area of scrutiny is revenue recognition at year-end. Orders that are placed before the end of the year but shipped at the beginning of a new year would be recognized in the new year. Companies have tried to manipulate these numbers to maximize revenue in one year or defer revenue to another. There’s a fine line between revenue planning and intentional manipulation so supporting documents are essential for internal staff and external auditors.
E-commerce companies must find ways to manage the issues that arise during the holiday rush. For companies operating on a fiscal year, the last quarter of the year is when revenues and volumes soar starting with Black Friday. In 2020, US e-commerce sales will reach $794.50 billion, up 32.4% year-over-year (source).
With the number of transactions skyrocketing with no end in sight, finance teams cannot rely on legacy financial systems and Excel since they are not built for scale. Legacy financial systems were designed decades ago and cannot show the transaction-level detail required for intensive accounting processes such as Matching and Cash Reconciliations. As a result, many finance teams resort to performing manual reconciliations in Excel. However, when transaction volumes and complexity reaches a certain threshold, Excel files become too large and impossible to work with.
E-commerce finance teams must address these challenges before it is too late. Ensuring that your team is proactive – instead of reactive – to these systems issues can help set your team up for success and avoid late nights come the holiday season.
The holiday peak season is when suppliers tighten their guidelines. Several suppliers and shippers have been known to withhold shipments if companies fail to make timely invoice payments. This is another opportunity to improve processes and ensure you’ve established trust with vendors so they won’t put your orders on the shelf.
Identifying contracts and performance obligations per the new revenue recognition standard requires collaboration amongst multiple functions within an organization. As the accountants figure out what journal entries to record, ambiguity in contract terms requires discussion with the sales team to clarify what’s been promised to customers. The legal team must review contracts with customers for clarity and negotiate terms as needed. Marketing plays a role too since they must figure out how to best articulate the products and services the company offers to customers.
Overall, the sentiment of ASC 606 revenue recognition has been a burdensome one, but it doesn’t have to be. As companies set goals for future growth, ASC 606 implementation requires steps to support the company’s goals. If you wanted to overhaul your billing system or update your process documentation, ASC 606 implementation provides many opportunities to do so.
Accounting teams are typically siloed yet touch every function of a business. Conversations amongst teams who may not regularly talk – accounting and sales, for example, must happen. Working together to solve problems around data integrity or existing issues in the order-to-cash cycle creates a more collaborative environment. The cross-functional collaboration amongst the teams is key to a successful implementation as most, if not all have a significant role to play as the company transforms.
COGS Considerations for E-Commerce Companies
COGS considerations for e-commerce companies are more complex than we assume. Here's a breakdown of everything you need to consider.
Accounting for COGS (Cost of Goods Sold) Examples
In this blog, we take a look at when to record COGS, how to differentiate between COGS and operating expenses, and more using an example.
Accounting for Point-of-Sale Financing
Many retailers have introduced point-of-sale (POS) financing, also known as "buy now, pay later", which adds a new wrinkle to revenue recognition.