I can pin down the exact date when SaaS businesses officially flipped the switch from a quote-to-cash to a quote-to-revenue world. December 15, 2017. The Financial Accounting Standards Board (FASB) ASC 606 standards went into effect. And suddenly revenue recognition became much more important, much more complicated — and much more integral to the entire sales process.
Let’s take a deeper dive into what quote-to-revenue really means and how SaaS businesses can embrace this business shift to unlock greater efficiencies, optimize revenue, and give more control to Finance teams.
The Transition From Quote-to-Cash to Quote-to-Revenue
Brief recap: Quote-to-cash (Q2C) came first and was a contained and linear process that encompassed all sales activity from configure, price, quote (CPQ) to invoicing, to cash collection. The focus was simple: how are we selling, how are we billing, how are we collecting.
Then once you had cash “in hand,” the quote-to-cash process was done and you’re all good. Right?
Not exactly.
Once ASC 606 went into effect, SaaS businesses were required to take into account revenue recognition. This upended the process formerly known as quote-to-cash. The new quote-to-revenue (Q2R) process created chaos as companies scrambled to be in compliance with new rev rec guidelines. But it also created new opportunities for those who were ready to embrace the implications.
There’s No Such Thing as a “Quick Fix” for Quote-to-Revenue
When businesses were challenged by ASC 606’s new guidelines, they started looking for solutions. And software companies that provided quote-to-cash solutions realized they needed to expand their offerings.
But the common approach was a “simple” fix that fell short.
The idea was to build or acquire a revenue recognition system and jerry rig an integration. Rev rec was just an add on. What that means is that many of these so-called “full” quote-to-revenue solutions (not to name names…) are, in fact, not complete offerings. They are two distinct point solutions, Frankensteined together. Two different solutions that need to be integrated and reconciled, that require manual workarounds, and that, honestly, don’t always play very nicely together.
But the downside to this add-on approach isn’t just the inefficiencies — it’s the missed opportunity to expand the case to revenue.
The Paradigm Shift That Drives Quote-to-Revenue
In the old model, your sales team would play around with quoting at the outset, running numbers their own way. It was only at the very end of the process that Finance would run their own numbers to find out if the quote would work for the business in terms of rev rec. The two teams were operating with separate data points, visibility, and goals.
The big paradigm shift is accepting that revenue doesn’t just come at the end, but that it should play a hand in the quoting process as well. Revenue is dependent on what comes earlier, and accurate, best-practice quoting is dependent on the revenue implications.
While the quote-to-cash model proceeded in a linear fashion with distinct silos for each part of the process, quote-to-revenue operates on more of a continuous spectrum, with each step connected and intertwined with every other step.
With a comprehensive quote-to-revenue process, you can catch potential issues at the time they happen. You have eyes on what’s going to help you meet your revenue goal — and what won’t — early on.
Sales is trying to work towards their quota, laser-focused on closing the next million dollar deal. But for Finance, a million dollar deal means nothing unless it can get back to the revenue. If it doesn’t, they can’t publish that number. The critical financial matrix that investors, boards, and the Street are looking for is much different from what happens on the sales side.
The true story lies in revenue recognition.
Because revenue is the main code driver for financial reporting, it’s essential that businesses have the ability, flexibility, visibility, and freedom to play around with different quoting options to see how it will trickle down through rev rec.
The Benefits of Operating in a Quote-to-Revenue World
In short, there are a number of benefits to a truly seamless quote-to-revenue process, but here are four of the biggest:
- More efficient operations. With a fully integrated platform, your entire process from quote to revenue recognition is smoother. All the operational pain points that result from disparate systems — from manual entry to clunky workarounds — can be eliminated. You can close better deals faster, bill more accurately, and feed all the data directly into quickly closing your books at quarter end.
- Better organizational structure. With one quote-to-revenue system and process, Finance has visibility much earlier, and Sales and Finance are on the same page, working in synchronous alignment towards a common goal.
- Empowered Finance team. Having Finance involved earlier gives them a lot more power, governance, and control. They can crunch the numbers proactively to see when the profit margin isn’t very high for a particular deal or how a deal will impact ARR. With this essential insight, the Finance team can promote or stop deals — whatever is best for revenue.
- Optimized revenue. The relationship with your customers doesn’t end at the point of cash collection. With a quote-to-revenue mindset, your business can focus on extending relationships with your customers past the point of cash collection on a single deal. Recurring relationships keep the cash collections coming on upsells, cross-sells, and deals that communicate ongoing value to your customers.
Revenue Recognition — So Much More Than An Add-On
We’ve seen similar evolutions successfully play out in other industries. Take HR. Historically, HRIS systems covered a wide variety of HR activities from lead application to performance, while payroll lived in a separate app. But payroll is 100% dependent on all the other activity that’s happening in your HRIS — like new hires and promotions — so there had to be a connector between the two systems. Nobody would ever consider payroll an “add-on” HR function. So why treat it like a separate process? Cut to today when HRIS systems encompass payroll as well, for end-to-end efficiency.
Likewise revenue recognition isn’t just an “add-on” function. It’s at the heart of your sales process and central to your business. It’s time for SaaS businesses to recognize and embrace an integrated approach to sales with a fully realized quote-to-revenue platform, process, and mindset. In other words: if rev rec is simply the final stage in your quote-to-revenue process, you’re doing it wrong.
