Revenue Recognition 101 for Small Businesses

From difficulties keeping up with big brands to reaching more customers, small businesses face several barriers in order to stay afloat in a competitive market. 

Our previous article about Women Business Owners mentioned that looking for funding is among the major obstacles that small businesses have to deal with. While some banks like Capital One are more open to women entrepreneurs, the financially risky nature of starting a new venture can make it challenging to access capital or loans from financial institutions in general.

Besides funding, small business owners can also find it difficult to manage revenue. Studies show that one in four small business owners say they lack confidence in their financial knowledge, while 14% have limited or zero knowledge about financial literacy. This can lead to poor management and recognition of revenue, which could affect your small business significantly. Effective revenue recognition is, therefore, essential to ensure accurate financial reporting and avoid legal repercussions in the future. 

Here’s what you need to know about revenue recognition:

What is revenue recognition?

Simply put, revenue recognition is the principle of recording your revenue or the total amount of money your small business makes. Under this principle, companies must recognize or record their revenue when it has been earned–or when goods or services have been delivered–rather than when payment has been received. This allows your small company to correctly report profits and losses and project potential revenues in the future. It also provides transparency by fairly evaluating or assessing revenue, leading to accurate reports sent to governing bodies.

As mentioned, incorrect or poor revenue recognition can lead to reputational and legal damages, which could take a huge financial toll on small enterprises. This is why regulating bodies oversee how businesses manage their accounting for guaranteed adherence to proper guidelines in reporting profits and losses. For instance, the Accounting Standards Codification 606 guidelines provide a cohesive framework for recognizing revenue across business models and industries. Ensuring precise revenue recognition and reporting can give you an accurate picture of your small business’s financial health. 

That said, here are some ways to maximize revenue recognition:

Strategies for effective revenue recognition

Producing financial statements that accurately reflect your small business’ earnings can be taxing and prone to human error. Luckily, there are available tools that can help make the process easier. Take SOFTRAX’s revenue recognition tools, for example; the tools leverage cloud-based solutions to provide automated complex revenue management processes. These online tools offer enterprise-level automated functions that can calculate complex accounting for more streamlined revenue recognition, eliminating the need for spreadsheets and manual errors. Leveraging these automation tools can help small business owners navigate the complexities of revenue recognition while focusing on other essential tasks to improve services.

Alongside automation tools, small businesses can also benefit from consulting or hiring a revenue manager. Chron notes that a revenue manager can guarantee proper accounting of revenues by managing a small company’s accounts receivable department to ensure that revenues from unpaid accounts are collected. A revenue manager can also prepare financial reports and help small business owners make decisions by predicting future revenues and analyzing market conditions. Investing in automation tools and revenue managers can help small businesses accurately record and report their revenue, thus avoiding any legal consequences that can damage their reputation and cause financial losses.

Revenue management or recognition, while crucial for businesses to manage finances and revenue, can be challenging for small business owners with no prior accounting knowledge or experience. Using revenue recognition software and hiring a revenue manager can help provide accurate reports and insights into financial performance.

Written by Regina James; regina.james.writes@gmail.com

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