What is revenue reconciliation and why it matters for startups

Revenue recognition and revenue reconciliation are crucial parts of a successful month-end close. Often, startups only focus on recording and recognizing transactions, but that’s only the first step. In this article, we cover the basics of revenue reconciliation: what it is, how to approach it, and why it’s important for your business. You’ll learn: 

1. The difference between revenue recognition and revenue reconciliation
2. Why revenue reconciliation is important
3. How to approach revenue reconciliation
4. Common mistakes when reconciling revenue  
5. How to prepare your startup for revenue reconciliation

Revenue recognition vs. revenue reconciliation

Let's start with the difference between revenue reconciliation and revenue recognition, a fundamental concept in the accounting world. 

Revenue recognition is a core component of a company's accounting policy that defines when its revenue is earned. The policy should comply with accounting standards such as GAAP, ASC606, and other technical accounting terms that aren't the focus of this article. For most startups, a complex accounting policy isn't required, and the concept of when revenue is "earned" is straightforward.

On the other hand, revenue reconciliation is a critical part of the month-end close (MEC) process to ensure accurate top-line financials. Revenue reconciliation is the act of reconciling all sales (services provided or goods delivered) and cash received in a specific period to determine what to record on the Income Statement (P&L) and Balance Sheet. This process also helps determine the Costs of Goods Sold (COGS) for the associated revenue to calculate gross margin.  

Why is revenue reconciliation important?

To answer this question, let’s consider what can happen when a business does not reconcile its revenue. In the short term, this can lead to missed orders and invoices, and under-collected cash. In the long term, it can impact a business’ ability to have an accurate view of its financials and to project future cash flows. 

A controlled reconciliation process gives startups access to accurate top-line financials needed for:

• A true understanding of its revenue, margins, and growth
• Investor and management reporting
• An accurate balance sheet and overall financial snapshot

How to approach revenue reconciliation

It all starts with the month-end close. The month-end close, also known as "closing the books," is a core accounting function that results in a monthly financial package for management, investors, lenders, and other key stakeholders. It involves transaction recognition and account reconciliation across the P&L and Balance Sheet.

Reconciling every balance sheet account is the key to a successful month-end close. More often than not, startups say, "all we need to do is record the transactions and we're done!" But that's only the first step. 

Month-end close has two distinct parts: recognition and reconciliation.

• Transaction recognition requires reviewing every transaction and coding it to the proper general ledger (GL) account.
• Account reconciliation requires proving account balances with supporting data and/or documentation.

In other words, recognition is booking the transaction to an account, while reconciliation proves you've recognized it correctly. 

To successfully reconcile revenue, a business needs to tie relevant GL accounts back to source data. The process generally follows these steps:

1. Record cash transactions
2. Reconcile sales data to recorded cash transactions
3. Record revenue entries using the reconciled sales data
4. Reconcile ending revenue balance sheet accounts (accounts receivable, funds in transit/clearing accounts, and deferred revenue)

At Furey, we record the transactions and then "prove" every balance sheet account with a monthly reconciliation process. To give you a sense of how labor and time-intensive the process can be, enterprise accounting departments spend anywhere from 40-50% of their time recording transactions and journal entries. The remaining time—almost half—is spent proving their work with supporting documents and reconciliations. It’s similar to checking your work in Math to ensure that you have the methodology and data to back up your results. 

Common mistakes with revenue reconciliation

Different business models and industries require technical accounting skills and a deep understanding of the company's operations to reconcile revenue correctly.

When reconciling revenue for SaaS companies, it’s important to have detailed knowledge of the terms of the contract—specifically, the timeframe that different services cover. Most errors happen when recorded revenue fails to reflect the dates at which invoices are issued for a service. Accountants must be able to generate and automate a revenue schedule that takes the process from start to finish. This includes accurately allocating between deferred revenue and accrued revenue.

 Other common revenue reconciliation errors:

• Errors in transaction recognition
• Missing or double booking transactions
• Aging or unconfirmed accounts receivable balances
• Incorrect mapping of transaction-level data
• Not reconciling deferred revenue on a customer/order level
• No formal month-over-month reconciliation process

So what’s the best way to ensure your revenue reconciliation is done correctly? Working with accounting professionals who know the ins and out of your business is a start. At Furey, our team of accountants gets to know your startup’s operations and data sources before diving into the books.

How to prepare your startup for revenue reconcilIation

Before working with an accountant, it's essential to have a complete list of your bank accounts, credit cards, payment processors, and other financial accounts. Depending on your business model, you may also need to have access to contract databases, order management systems, fulfillment systems, and more. Your accounting team will combine this data with a deep understanding of your business to establish monthly accounting processes. 

How we can help

Getting clean and auditable financials every month doesn’t have to be stressful. Our team of accountants and data experts streamlines your month-end close processes so you can focus on growing your business. Send us a note or get in touch at info@fureyfs.com to find out how we can work together.