Now You Know! A Personal Run-In with the Revenue Recognition Principle

A strong leadership moment occurred for me when I was challenged by the C-suite to bring in an extra of revenue in the final quarter of the fiscal year. I had to work through the emotional frustration from the request:

• How do I put the pressure on my sales and marketing teams to deliver?
• Why am I expected to overdeliver for those who have underdelivered?

Then it dawned on me that this request was impossible with current offerings because my products had a long revenue recognition period. The "ask" of me to deliver the additional revenue was not reasonable, or even possible, given the revenue could not be recognized quickly.

Revenue Recognition Refresher

Let’s pause for a quick review of FASB’s ASC Topic 606: Revenue from Contracts with Customers which provides us with a five-step framework for recognizing revenue.

1. Identify the contract(s)
2. Identify the separate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the separate performance obligations
5. Recognize revenue when the performance obligation is satisfied

The time between steps 1 and 5 can be short if the product or service is immediately delivered. If you walk into a coffee shop to order a latte and pastry, the time from placing the order (i.e., contract) to accepting the latte and pastry in full satisfaction of the contract is likely less than 10 minutes.

Back to My Story

My products were subscription-based with delivery over a period of time exceeding one year. And I had less than three months to deliver on the new revenue expectation.

Did I do it? I sure did. How?

1. I didn’t speak to another colleague until I had worked through my initial reaction and emotions.
2. I brainstormed new product solutions that could be delivered immediately so I could recognize the revenue instantly.
3. I made sure the product solutions could be marketed and sold to existing customers.
4. Most importantly, I ensured the product solutions would add irresistible value to our customers.
5. I presented the idea to my teams (product, marketing, sales, technology, and finance) as a value add to the customer that they could get behind.

And my teams did get behind my idea. Product ideation to execution was under two weeks. Revenue expectations were met. Customers were thrilled.

As you build your business acumen, don’t forget to think about the revenue recognition framework. I could have just as easily pushed my teams to deliver unrealistic expectations, and the results would likely not have been met, and the teams would have been frustrated.

I help individuals and teams build their business and financial acumen and I would love to help you. I have nearly 15 years of experience as corporate executive leading teams to success. That success is directly translatable to helping you succeed.

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