In the mobile first cloud first era, B2B and B2C businesses of all sizes are constantly introducing innovative subscription based products and service offerings and are finding new ways to generate recurring revenue to stay relevant in the business. The end goal is to get customers subscribed to their services, keep innovating at scale to retain customers and create more predictable revenue streams for their business.
The subscription model of generating revenue is great for organizations for predictable revenue and cash flow, but it also introduces new challenges for them to keep up with the complex billing and revenue recognition requirements. Organizations are challenged to create unique pricing models and easy & affordable bundling of their subscription offerings for faster customer adoption. This certainly requires them to have sophisticated business technology to manage the complex pricing(flat, tiered, flat tiered etc.), billing, revenue recognition and renewal needs. And of course, they have to stay complaint with the ever evolving regulation requirements around revenue allocations down to item level(specifically comply with ASC 606 and IFRS 15) and also manage revenue expense deferrals to align with US GAAP.
Here is an example. Company A sells their cloud based software apps and hardware in a variety of bundled subscriptions. The pricing model of these bundled offerings can be complex with tiered pricing requirements, based on what the customer subscribes to. For the customer, it is just a convenient subscription for which they pay a fixed fee either upfront annually, or pay them quarterly or monthly and they continue to take advantage of all the innovation Company A does in it’s software and hardware and stay up to date. However, Company A As an organization internally has to have the right business technology/application in order to manage the complex tiered pricing for the bundled contracts and be able to accurately bill. They also have to allocate revenues to multiple revenue streams and manage the financial obligations and performances.
The Good news: Dynamics 365 Finance now has the Subscription billing and revenue management capabilities built in the base offerings as part of the Dynamics 365 Finance SKU/license. You no longer need to look for ISVs solutions or external 3rd party apps to manage your subscription business. This new module and the features under it are designed specifically to tackle the billing and revenue management complexities of any subscription business and helps you shorten the quote to cash cycle. It also comes prebuilt with analytics and insights that can help your business leaders to make informed decisions.
Important Note: Microsoft introduced a standardone Revenue Recognition module back in 2020. The new Subscription management module is much more comprehensive, more capable and it does override the capabilities of the earlier Revenue recognition module. So you will first need to turn OFF the Revenue recognition module in the application before you can enable the new subscription management capabilities.
The 3 main features of the new Subscription management module are as follows.
Recurring Contract Billing: This is the heart of the module. This is where you define the structure of the contract and establish key billing parameters such as the customer account, terms, the line items, dates, terms, pricing, item billing type, billing frequency, schedule, requirements for deferrals, renewals, terminations and more. This part of the module lets you create billing schedules for contracts with customers and automate complex pricing and billing processes. It also let’s you produce consolidated invoices for customers with multiple items under their contracts.
After you have setup the billing schedules, you can view the automatically created billing schedule and associated details at any time. You can setup advanced pricing options, manage escalations and discounts and deferral requirements, putting contract lines on hold and terminations.
You can preview invoices by individual lines, or consolidated by item or period prior to creating them and you can also choose what type of transaction to use to create the invoice (Such as sales order Vs a free text invoice) and you can also choose whether You want to create the invoice lines for additional review or directly post them.
Revenue Allocation: This part of the module has the functionalities that allows your finance team automate pricing and revenue allocations across multiple items. This also helps organizations that have specifically have to comply with ASC 606 and IFRS 15 standards. This functionality also lets you set up a multi element revenue arrangement on contracts and manage those on the billing schedules. We will discuss this topic is greater details in future posts.
Revenue and Expense deferrals: This functionality allows organizations to manage revenue and expense deferrals to stay compliant with US GAAP standards. In the ever evolving regulations in the subscription economy, this functionality will help your finance teams to use less manual spreadsheets and allows them to manage those directly in the system. You can setup the system to automate the deferrals on a variety of source transactions such as sales orders, purchase orders, general journals, FTI and manual invoice journals. You can choose deferral schedule types such as “Straight line or event based” on your contract/billing schedule lines and also setup advanced deferral parameters on how you want to manage deferrals of discounts associated with revenues and expenses.
When you generate the invoices for the billing schedules, the system will automatically create your deferral schedules. You can view the details of the invoice associated with the deferral schedule.
You can manage deferrals from there on easily.
That’s it for this post. I just wanted to highlight some of the key capabilities of the new Subscription Billing module in Dynamics 365 Finance and how it can help manage your complex subscription billing and revenue requirements. We will get into details of each of these functionalities, the setups and processes involved in upcoming posts.
Till then, keep reading.